Bogleheads,
This month I opened a Solo 401k at Fidelity for my consulting business. I have already made a $5,500 contribution to my tIRA earlier this year, as I was unsure if I would be opening the solo 401k.
Last week, I transferred my tIRA assets into the solo 401k. I didn't know that my Vanguard admiral funds wouldn't transfer, so I currently have ETFs and other Mutual funds in the solo 401k, and the admiral funds are still in the Vanguard tIRA as they didn't trasfer.
I now realize that by opening the Solo 401k and thus being covered by an 'Employer's Retirement Plan' my income will be too high for a deduction for the Traditional IRA contribution.
Question: I believe I can simply withdraw this years' contribution of $5,500 from the remaining tIRA assets without penalty (simply paying cap gains on any earnings) but does the partial rollover into the 401k effect how I will calculate earnings? Does it disqualify me from simply withdrawing the current year contributions?
- g
Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
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Re: Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
If your income is too high to take the TIRA deduction, you should check if you're eligible for Roth IRA contribution. If eligible for Roth IRA contribution, recharacterize your $5500 TIRA contribution to a 2017 Roth IRA contribution. Note that the MAGI limit to take the TIRA deduction while covered by an employer plan is much lower than the MAGI limit for Roth IRA contribution. For single filer, full Roth IRA contribution is permitted with MAGI < 118K for 2017. If covered by employer plan, single filers with MAGI < 62K can take full TIRA deduction. Here's a link to IRS page on IRA deduction limits where you can see limits for TIRA deduction and Roth IRA contribution:
https://www.irs.gov/retirement-plans/ir ... ion-limits
If not eligible for any 2017 Roth IRA contribution, you can use the backdoor into to Roth IRA. Keep the TIRA contribution as is and make sure to file form 8606 with your tax return to track the non-deductible contribution (IRA basis). Convert to Roth IRA an amount equal to your IRA basis ($5500). Once the conversion is complete, roll all remaining assets in the TIRA into your Solo 401k. This leaves a ZERO balance in your TIRA on DEC 31, 2017 which means form 8606 will treat your $5500 Roth conversion as a full conversion. A full conversion of $5500 where you have $5500 IRA basis means the conversion will be non-taxable.
https://www.irs.gov/retirement-plans/ir ... ion-limits
If not eligible for any 2017 Roth IRA contribution, you can use the backdoor into to Roth IRA. Keep the TIRA contribution as is and make sure to file form 8606 with your tax return to track the non-deductible contribution (IRA basis). Convert to Roth IRA an amount equal to your IRA basis ($5500). Once the conversion is complete, roll all remaining assets in the TIRA into your Solo 401k. This leaves a ZERO balance in your TIRA on DEC 31, 2017 which means form 8606 will treat your $5500 Roth conversion as a full conversion. A full conversion of $5500 where you have $5500 IRA basis means the conversion will be non-taxable.
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Re: Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
There are other moving parts, but the term "covered" by an employer retirement plan is misleading. The true criteria is whether you are an "active participant". Opening the one-participant 401k and rolling over assets does not make you an active participant. Only contributions by or on behalf of a participant causes you to be an active participant.
Re: Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
You are fortunate that the Admiral shares did not transfer, otherwise it sounds like you would have rolled some IRA basis into the solo K, and that is not allowed. In an IRA rollover to a qualified plan, your basis is the last to transfer and therefore your basis remains in your TIRA in addition to some pre tax IRA dollars.
As for the TIRA contribution, it is not clear if you are covered by an employer plan for 2017 or your spouse is, if married. Rolling IRA money into the solo K is not a contribution for "active participant" purposes, but you are probably planning on making elective deferrals to the solo K for 2017 which would make you an active participant for 2017. If so, there is still time to complete the IRA rollover to the solo K, except DO NOT transfer your IRA basis into the solo K. If you complete the pre tax rollover to the solo k you can then convert the remaining IRA basis to your Roth IRA tax free.
As for the TIRA contribution, it is not clear if you are covered by an employer plan for 2017 or your spouse is, if married. Rolling IRA money into the solo K is not a contribution for "active participant" purposes, but you are probably planning on making elective deferrals to the solo K for 2017 which would make you an active participant for 2017. If so, there is still time to complete the IRA rollover to the solo K, except DO NOT transfer your IRA basis into the solo K. If you complete the pre tax rollover to the solo k you can then convert the remaining IRA basis to your Roth IRA tax free.
Re: Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
DSInvestor, Spirit Rider, Alan S. -- Thank you all for posting. (I have each of your post histories bookmarked, and attempt to gain all the knowledge I can from your past contributions)
My wife and I file a joint return, and my she is an active participant in her 401k. We do qualify for Roth contributions, but between state (NY) and federal taxes (25%), I'd like to put away as much tax deferred income as possible.
The $5,500 contribution in question is for the current tax year. Since I have the admiral shares that didn't transfer, could I simply:
1) liquidate $5,500 in admiral shares
2) Exchange the rest for investor class (could also be etf)
3) Transfer exchanged investor shares to 401k
4) WIthdraw remaining $5,500 from tIRA tax-free per IRS Pub 590, p. 33 (No earnings, as they were xfered to 401k?)
Again, thank you all
-g
My wife and I file a joint return, and my she is an active participant in her 401k. We do qualify for Roth contributions, but between state (NY) and federal taxes (25%), I'd like to put away as much tax deferred income as possible.
The $5,500 contribution in question is for the current tax year. Since I have the admiral shares that didn't transfer, could I simply:
1) liquidate $5,500 in admiral shares
2) Exchange the rest for investor class (could also be etf)
3) Transfer exchanged investor shares to 401k
4) WIthdraw remaining $5,500 from tIRA tax-free per IRS Pub 590, p. 33 (No earnings, as they were xfered to 401k?)
Again, thank you all
-g
Re: Issue With Non-Deductible tIRA contribution, Solo 401k Rollover
As an update, I spoke with a Vanguard 'complicated retirement representative' (seriously) and they said there would be no issue withdrawing the contributions with the plan in my previous post.
Thank you all for pointing me in the right direction.
-g
Thank you all for pointing me in the right direction.
-g