SEP to solo-401k

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

SEP to solo-401k

Post by sand575 »

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: 381
Joined: Thu Jul 12, 2018 10:13 pm

Re: SEP to solo-401k

Post by RIMDBogle »

You cannot do in same year contribution to both. Only one can be active. It is IRS limitation.
Topic Author
sand575
Posts: 31
Joined: Tue Jul 31, 2018 10:55 am

Re: SEP to solo-401k

Post by sand575 »

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: 116
Joined: Mon Mar 26, 2018 11:24 pm
Location: California

Re: SEP to solo-401k

Post by xenochrony »

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).
Topic Author
sand575
Posts: 31
Joined: Tue Jul 31, 2018 10:55 am

Re: SEP to solo-401k

Post by sand575 »

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: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: SEP to solo-401k

Post by Spirit Rider »

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: 381
Joined: Thu Jul 12, 2018 10:13 pm

Re: SEP to solo-401k

Post by RIMDBogle »

Here is the piece from IRS publication.

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
tesuzuki2002
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Joined: Fri Dec 11, 2015 11:40 am

Re: SEP to solo-401k

Post by tesuzuki2002 »

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: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: SEP to solo-401k

Post by Spirit Rider »

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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