Rolling IRAs into old solo 401K?

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RandomInjuryGirl
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Joined: Sat Jul 17, 2021 4:22 pm

Rolling IRAs into old solo 401K?

Post by RandomInjuryGirl »

I apologize if this has been answered before but I don't seem to have found the right combination of search terms to find it! I am a new poster but have been benefiting from reading these forums for awhile and am grateful for the advice of this community.

On to my plea:

My husband has a solo 401k with Vanguard that we opened with self-employment income in 2018. There's about 50K in it. We opened it with Vanguard because [life reasons overwhelming] and Vanguard was helpful to me after Fidelity sat me on hold for 2+ hours while I was trying to talk to someone about opening an account there. (I have made peace with Fidelity a little bit since and am quite happy with the DAF we have there.)

After a series of professional movements and life events, we are trying to consolidate a bunch of loose retirement accounts, and I learned here that Vanguard now allows rollovers into Vanguard solo 401Ks. There's about 600K in 2 rollover IRAs and a SIMPLE from a prior employer. We do not wish to roll any of these assets into his current 403b because the expense ratios/fees on it are really high. But consolidating into the solo 401K would get him backdoor Roth eligible which would be nice.

Husband hasn't had schedule C income since 2018 and it is HIGHLY unlikely to happen anytime in the next 5 years. I can't figure out if we are ok to roll funds into the solo 401K knowing that he is not actively "self-employed." I read an old post here that talked about rolling into a solo 401k for a dormant entities, but that was about an old account from a closed S-corp, which isn't relevant to our situation.

TL;DR: I'd like to roll 600K in IRAs into an existing solo 401K, but am nervous about doing something really stupid if there's some way that this is really ineligible due to some kind of test about ongoing self employment. I am hoping to find someone with experience related to this, or perhaps get a handle on how to phrase questions if we call a human at Vanguard.
pkcrafter
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Re: Rolling IRAs into old solo 401K?

Post by pkcrafter »

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HomeStretch
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Re: Rolling IRAs into old solo 401K?

Post by HomeStretch »

Welcome to the forum!

I am not an expert but I am not aware of any eligibility test for rollovers in to a Solo 401k related to ongoing self-employment as a sole proprietor.

As your spouse already sponsors an active Solo 401k plan with plan assets of $50k, it seems fine IMO to rollover the $600k from the SIMPLE IRA (if 2+ years since date of 1st participation in the plan) and rollover IRAs to the Solo 401k.

If you want a definitive expert answer, you could consult with a third-party plan administrator or a benefits attorney. You can try asking Vanguard but you may not receive an answer as they do not address tax or legal questions nor are they the plan administrator (spouse is).

Keep in mind the rollovers will increase your spouse’s Solo 401k plan balance above the $250k threshold for required annual filing of Form 5500-EZ.
SuzBanyan
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Re: Rolling IRAs into old solo 401K?

Post by SuzBanyan »

I think the question comes down to whether the plan will be treated as discontinued.

From the IRS:

“We haven’t made many contributions to our profit-sharing plan. How will this impact our plan termination?

Although employers are not required to contribute every year to a profit-sharing plan, contributions must be recurring and substantial. If the amount is not significant enough to show an intention to continue the plan, the IRS will treat the contributions as discontinued.

A plan is treated as terminated for vesting purposes if the employer completely discontinues contributions. The employees affected by the discontinuance must become 100% vested. Generally, you must vest all affected employees no later than the end of the taxable year following the taxable year in which you made your last substantial contribution (IRC Section 411(d)(3)).

The IRS presumes that an employer has completely discontinued contributions when the employer fails to make substantial contributions for at least 3 years in a 5-year period. If this happens, the burden shifts to the employer to show that a complete discontinuance has not occurred (Announcement 94-101)”
https://www.irs.gov/retirement-plans/re ... rminations

With no contributions for 2019, 2020 and probably not for 2021, it looks like you plan would be presumed to be discontinued in 2022. So while you might be able to roll funds in 2021, if there is not any contributions relating to self-employment, it is possible the plan would need to be terminated next year and all the funds rolled out to a different TDA.
Oenophileangler
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Re: Rolling IRAs into old solo 401K?

Post by Oenophileangler »

SuzBanyan wrote: Sun Jul 18, 2021 7:07 pm I think the question comes down to whether the plan will be treated as discontinued.

From the IRS:

“We haven’t made many contributions to our profit-sharing plan. How will this impact our plan termination?

Although employers are not required to contribute every year to a profit-sharing plan, contributions must be recurring and substantial. If the amount is not significant enough to show an intention to continue the plan, the IRS will treat the contributions as discontinued.

A plan is treated as terminated for vesting purposes if the employer completely discontinues contributions. The employees affected by the discontinuance must become 100% vested. Generally, you must vest all affected employees no later than the end of the taxable year following the taxable year in which you made your last substantial contribution (IRC Section 411(d)(3)).

The IRS presumes that an employer has completely discontinued contributions when the employer fails to make substantial contributions for at least 3 years in a 5-year period. If this happens, the burden shifts to the employer to show that a complete discontinuance has not occurred (Announcement 94-101)”
https://www.irs.gov/retirement-plans/re ... rminations

With no contributions for 2019, 2020 and probably not for 2021, it looks like you plan would be presumed to be discontinued in 2022. So while you might be able to roll funds in 2021, if there is not any contributions relating to self-employment, it is possible the plan would need to be terminated next year and all the funds rolled out to a different TDA.
Termination of a solo 401k was discussed in another thread,

viewtopic.php?p=6093882#p6093882

A 401k is intended to provide a place for retirement assets to reside throughout retirement. Upon retirement (in a solo 401k), of course there will be no further self-employment contributions. But it makes no sense for the 401k to have to be terminated.
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MP123
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Re: Rolling IRAs into old solo 401K?

Post by MP123 »

My understanding is that the plan needs to be terminated if/when the sponsoring entity (Corp or LLC) ceases to exist. I don't think that applies to a sole proprietor, but a call to Vanguard should clear that up.

In any case, as mentioned above, you'll need to start filling 5500-EZ annually for the i401k. Don't forget, the penalties are absurdly high.
panhead
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Re: Rolling IRAs into old solo 401K?

Post by panhead »

I have an old solo 401k which hasn't had contributions in many years that I have rolled funds from IRAs into in order to maintain my backdoor Roth IRA contributions without running afoul of the pro-rata rule. That being said I don't have an answer for you. I've asked the question many times as to whether or not the IRS requires a sole proprietor to close a solo 401k when they haven't had self employment income in some time. There doesn't appear to be a definitive answer because I'm not sure the IRS has ever questioned this kind of plan. With an actual "business" It seems to be more clear when the business is closed. With a sole proprietor, the view seems to be that the person is the business. This being the case, what does "closing" the business mean?

I think about this at least once a year and whether or not I should roll my solo-k into my workplace 401k...something I'd rather not do. So far I've kept it, but I do have some concern that the IRS will try to disqualify it at some point. So, directly to your question, you can certainly roll into your solo-k now but I think you will have to decide if you are ok with the risk that the IRS may try to disqualify the plan at some point. I would LOVE a clear answer to the question, but as I said, I'm not sure we have clarification from the IRS at this point.

If anyone on this forum knows a specific situation similar to this that has been answered, I'd be very interested!
SuzBanyan
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Re: Rolling IRAs into old solo 401K?

Post by SuzBanyan »

From resident guru SpiritRider in a 2019 post:
“The only time you would need to terminate a one-participant 401k is if the business sponsor ceases to exist. A disregarded single member LLC and sole proprietor generally exist from inception until death. I have never heard of the IRS requiring such a business entity to terminate a one-participant 401k due to inactivity. However, if you actually dissolve a disregarded multi-member LLC, partnership or an S-Corp, you must generally terminate the one-participant 401k within one-year.[emphasis added]”

viewtopic.php?t=282696

With the annual 550EZ filing, the plan will report no contributions, only rollovers. And the IRS guidance I posted above about 3 out of 5 years with contributions was based on IRS Announcement 94-101 which seemed concerned with 100% vesting of accounts when contributions stopped. Obviously, vesting in a Solo 401k is not a concern. So the IRS may never raise a concern.
panhead
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Re: Rolling IRAs into old solo 401K?

Post by panhead »

SuzBanyan wrote: Mon Jul 19, 2021 8:09 am From resident guru SpiritRider in a 2019 post:
“The only time you would need to terminate a one-participant 401k is if the business sponsor ceases to exist. A disregarded single member LLC and sole proprietor generally exist from inception until death. I have never heard of the IRS requiring such a business entity to terminate a one-participant 401k due to inactivity. However, if you actually dissolve a disregarded multi-member LLC, partnership or an S-Corp, you must generally terminate the one-participant 401k within one-year.[emphasis added]”

viewtopic.php?t=282696

With the annual 550EZ filing, the plan will report no contributions, only rollovers. And the IRS guidance I posted above about 3 out of 5 years with contributions was based on IRS Announcement 94-101 which seemed concerned with 100% vesting of accounts when contributions stopped. Obviously, vesting in a Solo 401k is not a concern. So the IRS may never raise a concern.
SuzBanyan, thank you very much for posting this. I had not seen this exchange from @SpiritRider before. This reinforces my thinking that there is no issue with me keeping open my solo-k when I haven't had self employment income for a while. In fact, as SpiritRider indicates, these plans were intended to be permanent.
SuzBanyan
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Joined: Thu Jun 02, 2016 11:20 am

Re: Rolling IRAs into old solo 401K?

Post by SuzBanyan »

panhead wrote: Mon Jul 19, 2021 6:21 pm
SuzBanyan wrote: Mon Jul 19, 2021 8:09 am From resident guru SpiritRider in a 2019 post:
“The only time you would need to terminate a one-participant 401k is if the business sponsor ceases to exist. A disregarded single member LLC and sole proprietor generally exist from inception until death. I have never heard of the IRS requiring such a business entity to terminate a one-participant 401k due to inactivity. However, if you actually dissolve a disregarded multi-member LLC, partnership or an S-Corp, you must generally terminate the one-participant 401k within one-year.[emphasis added]”

viewtopic.php?t=282696

With the annual 550EZ filing, the plan will report no contributions, only rollovers. And the IRS guidance I posted above about 3 out of 5 years with contributions was based on IRS Announcement 94-101 which seemed concerned with 100% vesting of accounts when contributions stopped. Obviously, vesting in a Solo 401k is not a concern. So the IRS may never raise a concern.
SuzBanyan, thank you very much for posting this. I had not seen this exchange from @SpiritRider before. This reinforces my thinking that there is no issue with me keeping open my solo-k when I haven't had self employment income for a while. In fact, as SpiritRider indicates, these plans were intended to be permanent.
A later post from SpiritRider in that thread pointed out something else that might matter to some. He wrote: “ This is correct. If you have amended a one-participant 401k to add an affiliated employer. The plan still has an employer sponsor and may continue. It is only when the plan has no employer sponsor that it must be terminated.

Note: You must have self-employed income in the current or any prior year for a sole proprietorship to be a one-participant 401k plan sponsor. You can't just terminate an S-Corp and say; "hey I'm a sole proprietor" and add that as an affiliated employer.”

That means if you have an LLC or S Corp that is the employer/entity with self-employment income), then you need to keep that entity in place to keep the 401k plan. That probably means annual filings with your state and probably some annual fees. Something to think about when forming a single member LLC.
Topic Author
RandomInjuryGirl
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Re: Rolling IRAs into old solo 401K?

Post by RandomInjuryGirl »

Thank you all so much for taking the time to share your thoughts and these resources with me. The week got obnoxiously busy (but maybe that is just middle age with two teenagers?) and it took me a few days to get back to the thread.

I definitely have a better vocabulary for asking questions at vanguard. I understood the basics of the form 5500 filing requirements but there was a lot of good information in the linked threads about what can happen later on when life circumstances change and you either draw down the 401K or the spouse that does all the handiwork shuffles off this mortal coil.

I suppose I could also ask him to do some cut-rate consulting work this year to stave off any concerns about the plan being discontinued...

The whole purpose of this was to try to get him into backdoor Roth territory but I'm honestly just incredibly nervous about the long term commitment to the paperwork of administering the plan, and how easy that can be to screw up. I feel like the simpler things get the better for my own peace of mind. His current employer just moved their plan to a new administrator and I am going to dig harder into the expenses and funds there. And then I can either roll everything into that 401K, or at least consolidate all of his stuff into a single rollover IRA.

I am grateful for the discussion and hope someday to have something to offer to help someone else on these forums:)
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