Hypothetical - i401k rollover to SEP IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jbreittling
Posts: 161
Joined: Sun Jul 15, 2012 9:48 pm

Hypothetical - i401k rollover to SEP IRA

Post by jbreittling »

I haven't been able to find this information on vanguard's website so I thought I'd ask the board. Hope you all don't mind.

I have a SEP IRA with vanguard. I opened an i401k this year with Vanguard as well with the idea of contributing more to my retirement d/t anticipated increases in revenue. So far, that's panned out and I'm targeting a fair amount to the i401k.

My question:

Am I allowed, at the end of the year, to roll over my i401k to my SEP IRA, and then next year, continue contributing to the i401k? I understand that I am not allowed to fund both through contributions in the same year. I'm sure it's too obvious, but if this is permissible, I'd just perform rollovers every year.

The reason I'm asking is because the fees in the i401k funds are greater (Investor shares regardless of the amount of funds contributed) than the fees for Admiral shares in the SEP IRA. I don't understand why Vanguard doesn't support Admiral shares in their i401k product, so this is why I'm here asking this question.
Lafder
Posts: 4127
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Hypothetical - i401k rollover to SEP IRA

Post by Lafder »

Interesting question since I am in the same situation.

In the past when I rolled over a retirement account, it always became a "Rollover IRA" and is listed as such at Vanguard, even though it started as a 401k or 403b. So that makes me think you can not rollover to a SEP.

I like that a SEP does not have the public reporting requirement once assets are above 250k that the i401k does. And I really do not like the Vanguard small business i401k website interface. I find it much more confusing than the SEP website interface.

I hope someone who knows will answer !

But, the final answer may have to be Vanguard. Did you ask them ?

lafder
Topic Author
jbreittling
Posts: 161
Joined: Sun Jul 15, 2012 9:48 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by jbreittling »

I haven't called them but I may need to do so tomorrow. Many times when I'm reading threads I see so many other great ideas I thought this may be one to spark some opinions from folks while at the same time providing some great education.

I'm glad I'm not the only one who sees this as a worthwhile question. I was hesitant to ask the board.
JDDS
Posts: 1056
Joined: Sun Mar 16, 2014 2:24 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by JDDS »

You might find this article helpful as a general rule: http://thefinancebuff.com/in-service-wi ... rules.html

Another forum member recently posted about being over 59.5 and rolling out Vanguard Individual 401(k) assets while keeping the plan active.

I wish Vanguard would relent and provide admiral shares, it sure would save us a lot of time around here.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by Spirit Rider »

Rollovers from Solo 401k plans to SEP IRAs are hypothetically permitted. However, as JDDS stated, employee salary deferrals are not permitted to be rolled over before age 59 1/2. Employer contributions can be rolled over. Rollovers also have to be allowed by the plan rules.

You may not maintain a 5305-SEP IRA and a Solo 401k at the same time. However, you can maintain a SEP-IRA account indefinitely to be the destination of rollovers.

So I'm afraid if you have the Solo 401k for the employee salary deferrals and you are not >= 59 1/2, you can not do what you wish.
niceguy7376
Posts: 3007
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Hypothetical - i401k rollover to SEP IRA

Post by niceguy7376 »

OP,
Another way to look at your issue:
You want to contribute to solo 401k for greater limits but want to rollover the amounts to SEP IRA for less fees. What would be the difference in fees be for the increased contribution to solo 401k compared to SEP IRA?

Also, if you have SEP IRA, you cannot do back door roths. If you are above direct roth ira contribution limits, you now dont have the ability to do backdoor roth. Would that additional 5.5K to back door roth ira factor into your decision?
Topic Author
jbreittling
Posts: 161
Joined: Sun Jul 15, 2012 9:48 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by jbreittling »

Thanks for the replies everyone. I tried calling Vanguard today but didn't have the time to hold. And I've just missed them tonight (lines close at 8pm EST for retirement services). I will respond to this thread after I've had a chance to talk with Vanguard about my question. Still happy I'm not the only one who thinks this is a valid question. Not bad for a novice like myself. :D
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Hypothetical - i401k rollover to SEP IRA

Post by Alan S. »

I think you could probably make your elective deferrals to the solo K and make the employer contributions to the SEP IRA subject to a combined 53k limit since you are employer on both.

But one problem as spirit rider pointed out is that you cannot maintain both plans using a 5305 SEP which is probably what you have with VG. You would need to establish an IRS approved prototype SEP or individually designed SEP and I do not know if VG offers either of these. You could probably easily find an IRA custodian that provides one of these and transfer to that SEP if you were interested.

One advantage of this is that the SEP offers you much more portability that the solo K, and your employer contribution would go directly to the SEP so you would not have to do any rollovers. Of course, the solo K elective deferrals cannot be distributed prior to 59.5 unless you dissolved the plan and terminated the business. One disadvantage of the SEP IRA is loss of the back door Roth option.
Topic Author
jbreittling
Posts: 161
Joined: Sun Jul 15, 2012 9:48 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by jbreittling »

My apologies for the delay getting back to this thread. I was finally able to carve out a few minutes to call Vanguard. I spoke with a gentleman in the i401k area. It's still kind of ambiguous, but here's what I learned.

I can indeed roll my i401k over into my SEP IRA. However, in order to do so, I first need to terminate my i401k, then roll the funds over.

I asked if there are any Vanguard rules about how many times a person is able to open an i401k. The answer was 'no limit on how many times a person can open an i401k', at least not to his knowledge. So in theory, I wonder if one could hypothesize the idea of opening a new i401k, fund it, rinse and repeat. He wouldn't comment any further but did chuckle a bit. He also recommended having a read of IRS publication 560 and/or contact a tax professional.

I suppose this isn't really an IRS issue but more so a Vanguard issue - folks being creative to lower their fees.
ERISA Stone
Posts: 1626
Joined: Tue Jun 24, 2014 8:54 am

Re: Hypothetical - i401k rollover to SEP IRA

Post by ERISA Stone »

jbreittling wrote:My apologies for the delay getting back to this thread. I was finally able to carve out a few minutes to call Vanguard. I spoke with a gentleman in the i401k area. It's still kind of ambiguous, but here's what I learned.

I can indeed roll my i401k over into my SEP IRA. However, in order to do so, I first need to terminate my i401k, then roll the funds over.

I asked if there are any Vanguard rules about how many times a person is able to open an i401k. The answer was 'no limit on how many times a person can open an i401k', at least not to his knowledge. So in theory, I wonder if one could hypothesize the idea of opening a new i401k, fund it, rinse and repeat. He wouldn't comment any further but did chuckle a bit. He also recommended having a read of IRS publication 560 and/or contact a tax professional.

I suppose this isn't really an IRS issue but more so a Vanguard issue - folks being creative to lower their fees.
Generally, you have to wait 12 months before opening another plan. Also, one of the basic requirements of a 401k plan is it should be intended to be permanent. There's no black and white guideline on permanency but I would advise at least 3 years for a non exception. I know some advisors who say 2 years.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by Spirit Rider »

Actually, this IS an IRS issue. A 401k is intended to a be semi-permanent plan. You are required to file a Form 5500 at termination regardless if the assets are >= $250K. A legitimate reason for termination of a 401k plan is the generally the closing of the business or establishment of a new plan at a different provider. I would guess multiple Form 5500s terminating successive plans at the same provider might get IRS scrutiny.

Seems like a lot of effort to accomplish what you want. You could just open an account at Fidelity and use their Spartan Advantage Index
Funds. On balance they have lower expense ratios than even Admiral Shares.

If you insist on Vanguard, another option to accomplish what you want is to "roll your own" i401k and use Vanguard as the asset custodian only. You would need a custom plan and some nominal TPA services. This will cost you about $1k to start up and maybe $200-$300/year. Not really cost effective, but you could get some other benefits; like rolling in IRAs, Mega Backdoor Roths, etc...
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Hypothetical - i401k rollover to SEP IRA

Post by Alan S. »

I agree that there are problems with this plan.

From the IRS Resource Guide:
401(k) Resource Guide - Plan Participants - General Distribution Rules

Generally, distributions of elective deferrals cannot be made until one of the following occurs:

•You die, become disabled, or otherwise have a severance from employment.


•The plan terminates and no successor defined contribution plan is established or maintained by the employer.


•You reach age 59½ or incur a financial hardship.
Your business continues and therefore you obviously have not had a severance from employment.
And a SEP IRA is considered a type of defined contribution plan as well as being an IRA. Therefore a successor DC plan (the SEP IRA) has been established. SEP IRAs are also subject to the 415c annual additions limit, which applies to DC plans.
Topic Author
jbreittling
Posts: 161
Joined: Sun Jul 15, 2012 9:48 pm

Re: Hypothetical - i401k rollover to SEP IRA

Post by jbreittling »

I'm glad I posted the response I received from Vanguard's rep. It looks like I need to find another option. It's time to do some more research. Thanks everyone.
Post Reply