SEP to solo-401k

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sand575
Posts: 23
Joined: Tue Jul 31, 2018 10:55 am

SEP to solo-401k

Post by sand575 » Tue Aug 14, 2018 3:26 pm

Hey guys. Quick question. I am currently funding a SEP but want to convert to a solo401k to be able to take advantage of a backdoor Roth conversion. Am I able to open a solo if I have been funding the SEP already this year? I talked with the folks at Fidelity and they said I was not able to however in the research I've done online it seems like I should be able to do this. Thanks.

RIMDBogle
Posts: 83
Joined: Thu Jul 12, 2018 10:13 pm

Re: SEP to solo-401k

Post by RIMDBogle » Tue Aug 14, 2018 3:47 pm

You cannot do in same year contribution to both. Only one can be active. It is IRS limitation.

sand575
Posts: 23
Joined: Tue Jul 31, 2018 10:55 am

Re: SEP to solo-401k

Post by sand575 » Tue Aug 14, 2018 5:21 pm

RIMDBogle wrote:
Tue Aug 14, 2018 3:47 pm
You cannot do in same year contribution to both. Only one can be active. It is IRS limitation.
What if we roll over all the funds in the SEP to the 401k and close out the SEP?

xenochrony
Posts: 39
Joined: Mon Mar 26, 2018 11:24 pm
Location: California

Re: SEP to solo-401k

Post by xenochrony » Tue Aug 14, 2018 5:28 pm

I spoke at length with the Small Business team at Vanguard about this exact issue. Yes, you can "have" an open solo401K and SEP IRA in the same year. What you cannot do is contribute to both in the same year. Once youve made a SEP contribution for fiscal year 2018, you cannot make a solo401K contribution in that same fiscal year. There are 2 workarounds/exceptions to this IRS rule, neither of which I think apply to you. In some situations, it may be possible to reclassify 2018 SEP contributions as 2017 contributions; clearing up the 2018 SEP contribution ledger. The second exception is that, at least at vanguard, you can contribute to a VG solo401k in the same year as a VG SEP IRA, so long as the SEP contribution is coded as a "traditional" IRA contribution (e.g. employee, not employer).

sand575
Posts: 23
Joined: Tue Jul 31, 2018 10:55 am

Re: SEP to solo-401k

Post by sand575 » Tue Aug 14, 2018 6:25 pm

xenochrony wrote:
Tue Aug 14, 2018 5:28 pm
I spoke at length with the Small Business team at Vanguard about this exact issue. Yes, you can "have" an open solo401K and SEP IRA in the same year. What you cannot do is contribute to both in the same year. Once youve made a SEP contribution for fiscal year 2018, you cannot make a solo401K contribution in that same fiscal year. There are 2 workarounds/exceptions to this IRS rule, neither of which I think apply to you. In some situations, it may be possible to reclassify 2018 SEP contributions as 2017 contributions; clearing up the 2018 SEP contribution ledger. The second exception is that, at least at vanguard, you can contribute to a VG solo401k in the same year as a VG SEP IRA, so long as the SEP contribution is coded as a "traditional" IRA contribution (e.g. employee, not employer).
Thanks, that makes sense. Will probably just keep contributing to a SEP in 2018 and do the i401k next year.

Spirit Rider
Posts: 8585
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP to solo-401k

Post by Spirit Rider » Tue Aug 14, 2018 6:52 pm

You can not contribute to a 5305-SEP IRA and maintain a 401k plan for the same tax year.

You can contribute to a prototype SEP IRA and maintain a 401k plan in the same tax year.

Vanguard has a 5305-SEP IRA.

RIMDBogle
Posts: 83
Joined: Thu Jul 12, 2018 10:13 pm

Re: SEP to solo-401k

Post by RIMDBogle » Wed Aug 15, 2018 11:01 am

Here is the piece from IRS publication.

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

tesuzuki2002
Posts: 501
Joined: Fri Dec 11, 2015 12:40 pm

Re: SEP to solo-401k

Post by tesuzuki2002 » Wed Aug 15, 2018 11:43 am

sand575 wrote:
Tue Aug 14, 2018 5:21 pm
RIMDBogle wrote:
Tue Aug 14, 2018 3:47 pm
You cannot do in same year contribution to both. Only one can be active. It is IRS limitation.
What if we roll over all the funds in the SEP to the 401k and close out the SEP?
if you can back out and undo your SEP contributions for 2018 then you can put them in the Solo 401k... but it's one or the other in any given year.

Spirit Rider
Posts: 8585
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP to solo-401k

Post by Spirit Rider » Wed Aug 15, 2018 4:29 pm

tesuzuki2002 wrote:
Wed Aug 15, 2018 11:43 am
sand575 wrote:
Tue Aug 14, 2018 5:21 pm
RIMDBogle wrote:
Tue Aug 14, 2018 3:47 pm
You cannot do in same year contribution to both. Only one can be active. It is IRS limitation.
What if we roll over all the funds in the SEP to the 401k and close out the SEP?
if you can back out and undo your SEP contributions for 2018 then you can put them in the Solo 401k... but it's one or the other in any given year.
Rolling over the SEP IRA contributions to a one-participant 401k does not correct the defect. The contributions still occurred in the 5305-SEP IRA for the tax year. "Maintaining" the SEP IRA for that tax year.

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