Convert SEP IRA to Solo 401 K

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EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Convert SEP IRA to Solo 401 K

Post by EinAustin » Wed May 31, 2017 2:01 pm

My wife and I own a company. We thought we would have an employee this year but now it looks like we won't.

For this year (2017) employer SEP IRA contributions have already been made. If I had known we wouldn't have an employee we would have set up the Solo 401 (K) instead. Is there a way to switch to a Solo 401(k) at this point in the year?

My SEP IRA has funds from previous years and some of the contribution this year has been in ETF's for about a month. My wife has only recently had the contribution in her SEP IRA but it is just in the money market fund at this point.

Thank you.

John Laurens
Posts: 222
Joined: Mon Nov 14, 2016 7:31 pm

Re: Convert SEP IRA to Solo 401 K

Post by John Laurens » Wed May 31, 2017 2:16 pm

Shouldn't be a problem to open solo 401k for you and your wife. Pick a company that allows incoming rollovers. My wife and I have our solo 401k with TDA. Vanguard's solo 401K does not accept incoming rollovers.

Regards,
John

Spirit Rider
Posts: 6209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Convert SEP IRA to Solo 401 K

Post by Spirit Rider » Wed May 31, 2017 11:32 pm

You can not have a 5305-SEP plan at the same time as a 401k. Most mainstream SEP IRA custodians (Vanguard, Fidelity, etc...) only offer a 5305-SEP plan. One notable exception is Schwab. They offer a prototype SEP plan that can be used in conjunction with a one-participant 401k.

This late in the year, there is possibly an option:
  1. Retroactively amend your SEP IRA plan to Schwab's SEP IRA plan effective 1/1/17
  2. Make a trustee -> trustee transfer of your SEP IRA assets to Schwab
  3. Adopt a one-participant 401k effective to 1/1/17. This allows the full year's business income to be the basis for contributions. Make written employee deferral elections as soon as possible. You can not make any 401k contributions prior to the actual adoption date and you can not make employee deferrals prior to the latter of the adoption date/employee deferral election.
  4. The total SEP IRA/401k employer contributions can not exceed the allowed employer contributions for the year. All SEP IRA/401k contributions can not exceed the annual addition limit.
While I believe this is allowed under IRS regulations, you will have to contact Schwab to determine if they allow this to be done.

Otherwise you will have to wait to 2018 to adopt and exclusively use one-participant 401k.

jjface
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Joined: Thu Mar 19, 2015 6:18 pm

Re: Convert SEP IRA to Solo 401 K

Post by jjface » Wed May 31, 2017 11:52 pm

I did something similar with the schwab route as set out by Spirit Rider. You should be fine. There is a section on the Schwab SEP prototype adoption agreement to set the effective date as the beginning of the year and to perform an amendment and restatement of an existing plan.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Convert SEP IRA to Solo 401 K

Post by EinAustin » Thu Jun 01, 2017 12:57 pm

jjface wrote:I did something similar with the schwab route as set out by Spirit Rider. You should be fine. There is a section on the Schwab SEP prototype adoption agreement to set the effective date as the beginning of the year and to perform an amendment and restatement of an existing plan.
Great. I was just about to make another post to see who offers prototype SEP IRA's. Thank you!

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Convert SEP IRA to Solo 401 K

Post by EinAustin » Thu Jul 06, 2017 1:02 pm

Thank you for the suggestions. I went to the Schwab office and they said I can transfer my SEP from Vanguard into a Solo 401 K plan with them.

ERISA Stone
Posts: 1280
Joined: Tue Jun 24, 2014 8:54 am

Re: Convert SEP IRA to Solo 401 K

Post by ERISA Stone » Thu Jul 06, 2017 2:11 pm

Spirit Rider wrote:You can not have a 5305-SEP plan at the same time as a 401k. Most mainstream SEP IRA custodians (Vanguard, Fidelity, etc...) only offer a 5305-SEP plan. One notable exception is Schwab. They offer a prototype SEP plan that can be used in conjunction with a one-participant 401k.

This late in the year, there is possibly an option:
  1. Retroactively amend your SEP IRA plan to Schwab's SEP IRA plan effective 1/1/17
  2. Make a trustee -> trustee transfer of your SEP IRA assets to Schwab
  3. Adopt a one-participant 401k effective to 1/1/17. This allows the full year's business income to be the basis for contributions. Make written employee deferral elections as soon as possible. You can not make any 401k contributions prior to the actual adoption date and you can not make employee deferrals prior to the latter of the adoption date/employee deferral election.
  4. The total SEP IRA/401k employer contributions can not exceed the allowed employer contributions for the year. All SEP IRA/401k contributions can not exceed the annual addition limit.
While I believe this is allowed under IRS regulations, you will have to contact Schwab to determine if they allow this to be done.

Otherwise you will have to wait to 2018 to adopt and exclusively use one-participant 401k.
Can the OP still do this since he already made 2017 contributions to the SEP?

Spirit Rider
Posts: 6209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Convert SEP IRA to Solo 401 K

Post by Spirit Rider » Thu Jul 06, 2017 6:51 pm

ERISA Stone wrote:
Spirit Rider wrote:This late in the year, there is possibly an option:
  1. Retroactively amend your SEP IRA plan to Schwab's SEP IRA plan effective 1/1/17
Can the OP still do this since he already made 2017 contributions to the SEP?
Yes, you can retroactively amend the plan by specifying the amendment effective date. This retroactively makes the contributions to the prototype SEP IRA.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Convert SEP IRA to Solo 401 K

Post by EinAustin » Thu Jul 06, 2017 9:35 pm

Schwab said they will allow this and gave me the paperwork to open the 401 k and transfer our accounts from Vanguard. I won't be able to turn in the paperwork until Monday. This is a big deal for us because we will be able to defer a lot of extra money with a high marginal tax rate this year. Thank you.

theplayer11
Posts: 171
Joined: Tue Jul 22, 2014 8:55 pm

Re: Convert SEP IRA to Solo 401 K

Post by theplayer11 » Sat Sep 23, 2017 12:45 pm

Great thread...my question is do you have to hold both the solo 401k and prototype SEP both at Schwab?
I was thinking of transferring my SEP from Vanguard to Schwab, adopting their prototype SEP, but opening the solo 401k with Vanguard. The reason would be because I already maxed out the SEP with Vanguard, but have more money this year for retirement. My plan is to open 401k with Vanguard and do the employee deferral for this year . Transferring my wife's and my own SEP would be a hassle.

Having already contributed to the SEP this year complicates things. I'm tempted to terminate the SEP with Vanguard(while keeping account open) and still open the 401k with Vanguard and do the employee investment this year. I realize that I'm not supposed to "maintain" these 2 at the same time, but if I don't over contribute on the employer side, not sure if the IRS would have a problem, or even know.

Spirit Rider
Posts: 6209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Convert SEP IRA to Solo 401 K

Post by Spirit Rider » Sat Sep 23, 2017 8:03 pm

No, you do not need to have a one-participant 401k at the same provider as your SEP IRA.

However, Vanguard's Individual 401k is a poor choice for your one-participant 401k:
  1. You do not have access to the lower expense ratio Admiral shares.
  2. You can not rollover the SEP IRA.
  3. You can not restrict employee eligibility.
We do not follow the rules in our tax system because we might get caught. We do it, because it is the legal right thing to do. I have no idea if the IRS is likely to catch you, but you should not treat 401k plan administration casually. A one-participant 401k is still 99.95% a 401k with all the laws, regulations, rules and procedures.

The consequences of uncorrected 401k plan errors can result in serious penalties/day. They can also result in disqualification of all employer retirement plans causing the forced non-qualified distribution of all assets subject to ordinary income tax and early withdrawal penalties. I'm not suggesting this is likely, but the IRS has very little tolerance and humor when it comes to qualified employer retirement plans (one-participant or not)

Don't assume that the internet is as anonymous as you think it is.

theplayer11
Posts: 171
Joined: Tue Jul 22, 2014 8:55 pm

Re: Convert SEP IRA to Solo 401 K

Post by theplayer11 » Sat Sep 23, 2017 8:25 pm

Spirit Rider wrote:
Sat Sep 23, 2017 8:03 pm
No, you do not need to have a one-participant 401k at the same provider as your SEP IRA.

However, Vanguard's Individual 401k is a poor choice for your one-participant 401k:
  1. You do not have access to the lower expense ratio Admiral shares.
  2. You can not rollover the SEP IRA.
  3. You can not restrict employee eligibility.
We do not follow the rules in our tax system because we might get caught. We do it, because it is the legal right thing to do. I have no idea if the IRS is likely to catch you, but you should not treat 401k plan administration casually. A one-participant 401k is still 99.95% a 401k with all the laws, regulations, rules and procedures.

The consequences of uncorrected 401k plan errors can result in serious penalties/day. They can also result in disqualification of all employer retirement plans causing the forced non-qualified distribution of all assets subject to ordinary income tax and early withdrawal penalties. I'm not suggesting this is likely, but the IRS has very little tolerance and humor when it comes to qualified employer retirement plans (on-participant or not)

Don't assume that the internet is as anonymous as you think it is.
yes, I understand what you are saying...it's just very frustrating when rules are not so easily spelled out or make little sense. Like why can someone have a prototype SEP along with an i401k, but not a 5305 SEP(which is the IRS version and most common) with a i401k? Why would it matter as long as the contributions are within the legal limits.
I plan to transfer our SEPs to Schwab and then amend and restate to their prototype SEP and then open the i401k there as well. Next step would be to rollover into the i401k.(I think that is the processs)

Spirit Rider
Posts: 6209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Convert SEP IRA to Solo 401 K

Post by Spirit Rider » Sat Sep 23, 2017 9:01 pm

Nobody ever said tax law, regulations and rules have to make sense. In fact, this is far from the only case where things make no sense.

theplayer11
Posts: 171
Joined: Tue Jul 22, 2014 8:55 pm

Re: Convert SEP IRA to Solo 401 K

Post by theplayer11 » Thu Sep 28, 2017 8:48 pm

My wife and I opened the SEPs with Schwab. Very simple, just waiting on the transfers from Vanguard now. I amended the plan to their prototype plan(not 5305) to 1/1/17. This will allow us to contribute our employee deferrals to our solo 401ks(also easily just set up with Schwab).
Thank you Spirit Rider for the great advice and setting me straight.

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