Vanguard SEP IRA to Solo 401k Considerations

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Topic Author
Polaris
Posts: 455
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Vanguard SEP IRA to Solo 401k Considerations

Post by Polaris » Mon Mar 12, 2018 12:55 pm

I've had a Vanguard SEP IRA for 15+ years for my one person S Corp, and have been considering moving to a solo 401k to take advantage of employee contributions since I have been maxing out the employer profit-sharing contribution for many years. I've been waffling a bit on this though due to the various limitations of the offerings at Vanguard and Fidelity.

Some of what I've been thinking:
  • Since Vanguard apparently doesn't allow you to hold Admiral shares in a solo 401k, that means that rolling my existing Vanguard SEP IRA (high six figure balance) into a Vanguard solo 401k isn't very appealing, let alone contributing new money there. It seems to me that the ideal situation for me would be to continue to make profit sharing contributions to the Vanguard SEP, and only make employee contributions to say, a Fidelity solo 401k, but I would be stunned if that was allowed. Failing that, I could leave my Vanguard SEP in place and stop contributing to it, and direct all new employer and employee contributions to the Fidelity solo 401k with a portfolio consisting of low-cost Spartan index funds.
  • I have an old 401k from a prior employer at Fidelity, which I have left there for access to the Vanguard Institutional Total International Stock Market Index Trust (0.069% ER). I'd be counting on Fidelity allowing me to leave this old 401k untouched if I open a new solo 401k with them.
  • My wife and I still qualify for Roth IRA contributions, so a Roth option would be nice to have in the future but is not a deal-breaker now.
  • I don't care about 401k loans.
  • Looking for simple and cheap administration of a solo 401k (leaving high six figure SEP in place and starting fresh with a solo 401k will keep me under a $250k solo 401k balance and avoid IRS Form 5500-SF reporting for several years, right?).
So basically, is it possible (and my best option) to:
  1. Leave my Vanguard SEP in place (with Admiral shares) and simply stop contributing to it.
  2. Open a Fidelity solo 401k and direct all 2018+ employee and employer contributions to it while leaving my old Fidelity 401k in place.
  3. Avoid filing IRA Form 5500-SF for several years until my solo 401k balance hits $250k.
Is there a better option or any potential gotchas I'm missing? If I decide to do this, I'd like to have it in place for my April payroll. Any insight would be greatly appreciated, thanks!

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

Re: Vanguard SEP IRA to Solo 401k Considerations

Post by Spirit Rider » Mon Mar 12, 2018 1:03 pm

In addition to no Admiral Shares, Vanguard 's Individual 401k does not accept rollovers even from their own SEP IRA. You can not maintain a 5305 SEP IRA in the same year as a 401k. Vanguard's SEP IRA is a 5305-SEP.

If you have not contributed to the SEP IRA for 2018, you can adopt a Fidelity Self-Employed 401k for 2018. You can the deduct elective employee deferrals from the first payroll after making an employee deferral election. If you make the plan effective on 01/01/2018, you can make employer contributions up to 25% of compensation for the entire year. Including the period after the effective date and before the adoption date.
Last edited by Spirit Rider on Mon Mar 12, 2018 1:14 pm, edited 1 time in total.

Topic Author
Polaris
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Re: Vanguard SEP IRA to Solo 401k Considerations

Post by Polaris » Mon Mar 12, 2018 1:11 pm

Spirit Rider wrote:
Mon Mar 12, 2018 1:03 pm
In addition to no Admiral Shares, Vanguard 's Individual 401k does not accept rollovers even from their own SEP IRA.

You can not maintain a 5305 SEP IRA in the same year as a 401k. Vanguard's SEP IRA is a 5305-SEP.

If you have not contributed to the SEP IRA for 2018, you can adopt a Fidelity Self-Employed 401k for 2018.
Does "maintain" simply mean contributing to the SEP, or just having it open (even if no contributions are made)?

The only SEP IRA contribution I made in calendar year 2018 was for tax year 2017 since I wanted to max it out and didn't know what that number would be until calendar year 2017 was complete. I will make zero SEP contributions starting with tax year 2018 as long as I open the solo 401k.

Spirit Rider
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Re: Vanguard SEP IRA to Solo 401k Considerations

Post by Spirit Rider » Mon Mar 12, 2018 1:22 pm

A 401k is considered maintained for tax years from its adoption date until its termination date.

There is no required custodian or IRS notification of an SEP IRA termination/suspension. With non-owner employees other than a spouse, a SEP IRA must properly notify their employees of termination.

However, since you have until your tax filing deadline including extensions to make SEP IRA contribution. An owner-only SEP IRA is presumed to be only maintained for tax years for which there is a contribution.
Last edited by Spirit Rider on Mon Mar 12, 2018 1:32 pm, edited 1 time in total.

SpideyIndexer
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Re: Vanguard SEP IRA to Solo 401k Considerations

Post by SpideyIndexer » Mon Mar 12, 2018 1:22 pm

I suppose you are not interested in making backdoor Roth contributions. If you are, basically you'll want to zero out your TD IRAs, including the SEP. Since Fidelity's SE-401(k) plans accept rollovers, you could roll over your Vanguard SEP IRA(s) into a Fidelity account(s) which will allow annual tax-free backdoor Roth contributions of $5500 each for you and your spouse ($6500 if over 50.)

Topic Author
Polaris
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Re: Vanguard SEP IRA to Solo 401k Considerations

Post by Polaris » Mon Mar 12, 2018 1:31 pm

SpideyIndexer wrote:
Mon Mar 12, 2018 1:22 pm
I suppose you are not interested in making backdoor Roth contributions. If you are, basically you'll want to zero out your TD IRAs, including the SEP. Since Fidelity's SE-401(k) plans accept rollovers, you could roll over your Vanguard SEP IRA(s) into a Fidelity account(s) which will allow annual tax-free backdoor Roth contributions of $5500 each for you and your spouse ($6500 if over 50.)
Yes, we still have income levels that will allow us to make regular Roth IRA contributions for several years, so backdoor Roth contributions aren't a concern for now. Assuming I could roll my SEP or old 401k into the solo 401k at a future date, I should have that flexibility in the future if I end up needing it.

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