Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Tue Jun 11, 2019 9:35 am

Hello,

I recently left my MegaCorp and have joined a small company where I am paid via 1099. I have also established a Self Employed 401K with MySolo401K.net (shout out to them, it has been a great experience thus far).

I have three accounts as part of this Solo 401K all established at Fidelity: a pre-tax, after-tax, and roth.

I am planning to roll my MegaCorp 401K (very good plan, many options and cheap ER) assets and pension to my pre-tax Self Employed 401K, but I wanted to make sure there wasn't anything I was missing before doing this. My 401K is about $200k and pension will be around $35k (7 years with MegaCorp).

I would hate to initiate this transfer and later realize I shouldn't have for some reason, so at least wanted to run it by the forum.

Thank you all
Last edited by ef11 on Tue Jun 11, 2019 10:16 am, edited 1 time in total.
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

lakpr
Posts: 1574
Joined: Fri Mar 18, 2011 9:59 am

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by lakpr » Tue Jun 11, 2019 9:48 am

The most obvious thing that I can think of is Asset Protection; with ERISA compliant 401k plans, the creditor protection is absolute. The Solo 401k plan may depend on state law instead of ERISA for asset protection, which may or may not offer the same level of protection.

Of course, it is up to you to determine whether this will be a deciding factor. For example, if you happen to be in an at fault accident and have a judgment against you, your Solo 401k plan assets can theoretically be at risk; if your state law does offer asset protection, you may still need to show up in the court and make an affirmative defense, whereas with actual 401k plans, the request for garnishing assets isn’t even entertained; this is what I mean by “absolute” protections.

Of course, carrying a large umbrella insurance may protect you in this specific example scenario. But it is easy to think of other scenarios where an umbrella insurance may not be able to protect you. Professional misconduct judgment could be one, large medical expenses could be another, etc.

I AM NOT A LAWYER; this is just my understanding after looking into a lot of Google hits on the topic. Do your own research, and of course decide if this benefit means something to you.

P.S: a very knowledgeable poster on this forum gave the example of OJ Simpson. Why do you think Fred Goldman hasn’t been able to collect from OJ in spite of having a multi million dollar judgment? His NFL pension is ERISA protected!
Last edited by lakpr on Tue Jun 11, 2019 9:51 am, edited 2 times in total.

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Tue Jun 11, 2019 9:51 am

The only reason I can think of is that this Solo 401k is new and the company running it is fairly new if I'm not mistaken. You are happy with the service so far, but that doesn't mean much at this point.

There is no rush to move the old 401k. It can stay right where it is. It might even accept your pension. I'd probably use the new plan a year before rolling over anything.

niceguy7376
Posts: 2318
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by niceguy7376 » Tue Jun 11, 2019 11:09 am

Another topic to consider.
Once your solo 401k account balance crosses 250K, you need to file Form 5500-EZ.
Based on your plan to open a solo 401k that allows after tax (not roth), you might be close to contributing the yearly max of 56K.
Combine this with 200K rollover, you might need to file the form in the first year itself.

billfromct
Posts: 914
Joined: Tue Dec 03, 2013 9:05 am

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by billfromct » Tue Jun 11, 2019 1:00 pm

I just checked mysolo401k.net & it appears they charge $550 to set up the Solo 401k then charge a $125 annual fee.

It sounded like they work through Fidelity, Schwab, E-Trade, & TD Ameritrade. So I guess Fidelity, Schwab, etc. will charge their own fees on the funds that are invested in. (Edit:. I meant the expense ratio fees of the individual mutual funds that would be used.)

When I helped my daughter open her Vanguard Solo 401k several years ago, there were no setup fees to open her Solo 401k & no annual fee.

Along with low expense ratios on the funds she uses with Vanguard, I don't know why anyone would use mysolo401k.net when you could use Vanguard, Fidelity, or others at much lower costs. (Edit:. I meant new individual 401k users like the OP & my daughter who are looking to start their retirement as a contract worker or self employed person not some of the more complex examples that were mentioned.)

I only skimmed the mysolo401k.net website, so I may have misunderstood how they work through Fidelity, Schwab, etc., but they do BOLD their fee structure.

bill
Last edited by billfromct on Wed Jun 12, 2019 12:48 am, edited 1 time in total.

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Tue Jun 11, 2019 3:13 pm

billfromct wrote:
Tue Jun 11, 2019 1:00 pm
Along with low expense ratios on the funds she uses with Vanguard, I don't know why anyone would use mysolo401k.net when you could use Vanguard, Fidelity, or others at much lower costs.
Perhaps because it offers the after-tax account with in-service rollover to Roth (mega back door). It may also accept income rollovers which Vanguard does not do but some of the others will do.

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Tue Jun 11, 2019 5:57 pm

retiredjg wrote:
Tue Jun 11, 2019 3:13 pm
billfromct wrote:
Tue Jun 11, 2019 1:00 pm
Along with low expense ratios on the funds she uses with Vanguard, I don't know why anyone would use mysolo401k.net when you could use Vanguard, Fidelity, or others at much lower costs.
Perhaps because it offers the after-tax account with in-service rollover to Roth (mega back door). It may also accept income rollovers which Vanguard does not do but some of the others will do.
Yes, exactly.

- It will accept rollovers from other 401ks or pension plans
- It allows for after-tax -> Roth conversions or the Mega Backdoor Roth
- It is a self-directed account, so you can use the money to invest in almost anything

I essentially paid this fee to be able to put an additional $19,000 in a Roth this year instead of in a taxable brokers. My 1099 income during a full year (only 6 months of full-time 1099 in 2019) will allow me to make all $56,000 as tax deductible, so the Mega Backdoor won't be an option for me (maybe $1,000-$3,000 a year) but the self-directed nature of it and the initial $19,000 in Roth is worth the fee to me.

Thank you all for the replies on Asset Protection and the tax forms. I am conducting further research into this. I did find some good assurances on the company's website as seen below:

https://www.mysolo401k.net/texas-solo-401k-plan/

Texas Solo 401k Plan Highlights
Shielded from Creditors: Since Solo 401k or self-directed 401k falls under federal code (ERISA) and 401k anti-alienation protection, your retirement assets are shielded from creditors in the State of Texas.

Approved by IRS: Ultimately all 401ks including Solo 401k are approved by the IRS through the issuance of an IRS Opinion Letter.

Solo 401k Checkbook Control: Since we name you Trustee of your Solo 401k Plan and our Solo 401k plan document allows for investing in both equities (mutual funds and stocks), and alternative investments (real estate, notes, precious metals, tax liens, private business, etc.) by writing a check, we will assist you in opening Solo 401k checking account at your local bank or credit union in the State of Texas.
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Tue Jun 11, 2019 6:05 pm

ef11 wrote:
Tue Jun 11, 2019 5:57 pm
- It is a self-directed account, so you can use the money to invest in almost anything
Hmmmm, are you sure? I know this can be done with an IRA but I can't recall hearing it about a 401k. Just doesn't feel right to me, but I have no knowledge of it either way.

User avatar
beyou
Posts: 2575
Joined: Sat Feb 27, 2010 3:57 pm
Location: Northeastern US

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by beyou » Tue Jun 11, 2019 6:48 pm

What if you move from Texas ?

I would leave the money in a good 401k (which you indicated was the case).
You can always rollover and consolidate in the future if you are ever on another good ERISA 401k.

My employer has a really good 401k, so I consolidated from older lousy ones many years later (when I got around to it).
So I have the best of all worlds, consolidation, NATIONAL asset protection.

How old are you ? For folks in their 50s, at age 55 there is another benefit to an employer 401k.

To me it's a hassle to switch, so I didn't bother until I had a really good employer plan into which I can consolidate.

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Tue Jun 11, 2019 6:49 pm

retiredjg wrote:
Tue Jun 11, 2019 3:13 pm
billfromct wrote:
Tue Jun 11, 2019 1:00 pm
Along with low expense ratios on the funds she uses with Vanguard, I don't know why anyone would use mysolo401k.net when you could use Vanguard, Fidelity, or others at much lower costs.
Perhaps because it offers the after-tax account with in-service rollover to Roth (mega back door). It may also accept income rollovers which Vanguard does not do but some of the others will do.
billfromct wrote:
Tue Jun 11, 2019 1:00 pm
I just checked mysolo401k.net & it appears they charge $550 to set up the Solo 401k then charge a $125 annual fee.

It sounded like they work through Fidelity, Schwab, E-Trade, & TD Ameritrade. So I guess Fidelity, Schwab, etc. will charge their own fees on the funds that are invested in.
There are no fees to use investment only accounts at Fidelity, Schwab, E-Trade or TD Ameritrade other than standard transactions fees for marketable securities (stocks, ETFs, bonds) and standard expense ratios of their funds. No fees to use a custodian's own mutual funds and/or their No-Transaction-Fee mutual funds and ETFs.

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Tue Jun 11, 2019 6:57 pm

retiredjg wrote:
Tue Jun 11, 2019 6:05 pm
ef11 wrote:
Tue Jun 11, 2019 5:57 pm
- It is a self-directed account, so you can use the money to invest in almost anything
Hmmmm, are you sure? I know this can be done with an IRA but I can't recall hearing it about a 401k. Just doesn't feel right to me, but I have no knowledge of it either way.
Yes, custom 401k plans can invest in alternative investments, not that I ever recommend it. It is far too easy to engage in a prohibited transaction and result in the forced distribution of all assets subject to ordinary income taxes and a 10% early withdrawal penalty. My opinion is stick to using a custom one-participant 401k plan for the Mega Backdoor Roth and traditional investments. Take your risks with your taxable accounts where you can tax lost harvest your mistakes.

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Tue Jun 11, 2019 7:12 pm

Thanks Spirit Rider. Shocking. Just shocking. :happy

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Tue Jun 11, 2019 8:00 pm

ef11 wrote:
Tue Jun 11, 2019 5:57 pm
https://www.mysolo401k.net/texas-solo-401k-plan/

Texas Solo 401k Plan Highlights
Shielded from Creditors: Since Solo 401k or self-directed 401k falls under federal code (ERISA) and 401k anti-alienation protection, your retirement assets are shielded from creditors in the State of Texas.
This is 100% FALSE. Only retirement plans covering employees are ERISA qualified. From DOL regulation 29 CFR § 2510.3-3 - Employee benefit plan, (c) Employees. For purposes of this section and except as provided in § 2510.3-5(e):
  1. An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and
  2. A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.
A one-participant 401k by definition is NOT an ERISA qualified plan. It receives NO ERISA anti-alienation asset protection.

MySolo401kFinancial is a low cost provider of custom 401k plan documents, but they are not a third party administrator (TPA) and they are not a reliable source of information on the Internal Revenue Code (IRC), Code of Federal Regulations (CFR) and other IRS guidance on 401k plans. I read through their website and found more than a dozen blatantly false statements about the administration of one-participant 401k plans.

I see no problem with using them for custom 401k plan documents and help with 1099-R preparation and filing, but I would not trust anything else they say on their website or directly unless you have independent verification. Several times on here or WCI I have had to correct blatantly incorrect advice several times to forum participants, if followed would have resulted in serious 401k plan errors that could have resulted in disqualification of the 401k plan.

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Tue Jun 11, 2019 8:11 pm

Spirit Rider wrote:
Tue Jun 11, 2019 6:57 pm
retiredjg wrote:
Tue Jun 11, 2019 6:05 pm
ef11 wrote:
Tue Jun 11, 2019 5:57 pm
- It is a self-directed account, so you can use the money to invest in almost anything
Hmmmm, are you sure? I know this can be done with an IRA but I can't recall hearing it about a 401k. Just doesn't feel right to me, but I have no knowledge of it either way.
Yes, custom 401k plans can invest in alternative investments, not that I ever recommend it. It is far too easy to engage in a prohibited transaction and result in the forced distribution of all assets subject to ordinary income taxes and a 10% early withdrawal penalty. My opinion is stick to using a custom one-participant 401k plan for the Mega Backdoor Roth and traditional investments. Take your risks with your taxable accounts where you can tax lost harvest your mistakes.
Thanks for all of the comments.

90% of the reason I went through MySolo401k was because I wanted to have the Mega Backdoor Roth option (I have had it with MegaCorp for years, just couldn't lose it) and because when I first contacted them I spoke with one of the owners for almost an hour and he was extremely helpful.

The self-directed piece is a nice feature, but as most have advised it is probably not a good idea for most and I agree with this. However, if I ever do need this feature, it is nice to have.
beyou wrote:
Tue Jun 11, 2019 6:48 pm
How old are you ? For folks in their 50s, at age 55 there is another benefit to an employer 401k.
I am 30.
Spirit Rider wrote:
Tue Jun 11, 2019 8:00 pm
ef11 wrote:
Tue Jun 11, 2019 5:57 pm
https://www.mysolo401k.net/texas-solo-401k-plan/

Texas Solo 401k Plan Highlights
Shielded from Creditors: Since Solo 401k or self-directed 401k falls under federal code (ERISA) and 401k anti-alienation protection, your retirement assets are shielded from creditors in the State of Texas.
This is 100% FALSE. Only retirement plans covering employees are ERISA qualified. From DOL regulation 29 CFR § 2510.3-3 - Employee benefit plan, (c) Employees. For purposes of this section and except as provided in § 2510.3-5(e):
  1. An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and
  2. A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.
A one-participant 401k by definition is NOT an ERISA qualified plan. It receives NO ERISA anti-alienation asset protection.

MySolo401kFinancial is a low cost provider of custom 401k plan documents, but they are not a third party administrator (TPA) and they are not a reliable source of information on the Internal Revenue Code (IRC), Code of Federal Regulations (CFR) and other IRS guidance on 401k plans. I read through their website and found more than a dozen blatantly false statements about the administration of one-participant 401k plans.

I see no problem with using them for custom 401k plan documents and help with 1099-R preparation and filing, but I would not trust anything else they say on their website or directly unless you have independent verification. Several times on here or WCI I have had to correct blatantly incorrect advice several times to forum participants, if followed would have resulted in serious 401k plan errors that could have resulted in disqualification of the 401k plan.
Thanks for this info, very good to have. I guess this means I should leave my MegaCorp 401k in place and use the new one for contributions from here on out...great, now I only have 7 different accounts to manage :)

I guess I should look for a good umbrella policy as well once this account begins to grow.
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

leveraged
Posts: 9
Joined: Thu Mar 29, 2018 4:51 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by leveraged » Tue Jun 11, 2019 11:28 pm

Spirit Rider wrote:
Tue Jun 11, 2019 8:00 pm
MySolo401kFinancial is a low cost provider of custom 401k plan documents, but they are not a third party administrator (TPA) and they are not a reliable source of information on the Internal Revenue Code (IRC), Code of Federal Regulations (CFR) and other IRS guidance on 401k plans. I read through their website and found more than a dozen blatantly false statements about the administration of one-participant 401k plans.
Completely agree with Spirit Rider's assessment of MySolo401k. I have a plan through them and I've received blatant misinformation on serious matters. When asking them about my allowed contribution limits, I got two terrible answers. First, they had no idea that a profit-sharing contribution reduces your available after-tax space by 2x (something that Spirit Rider talks about all the time). Even when I tried to explain this to them, they did not understand what I was talking about.

I also asked them to confirm my available contribution figures based on my business income. Because I have a W2 salary that exceeds the SS cap, my SE tax is only the Medicare portion. When I asked to confirm the figures, they insisted that didn't matter, using their online SE tax calculator as a source instead of my actual tax return.

But, I am setup with a mega-backdoor Roth and I value it, so I view their service as buying an IRS-approved plan document with MBR option.

bryansmile
Posts: 148
Joined: Wed Feb 12, 2014 10:14 am

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by bryansmile » Wed Jun 12, 2019 7:02 am

leveraged wrote:
Tue Jun 11, 2019 11:28 pm

Completely agree with Spirit Rider's assessment of MySolo401k. I have a plan through them and I've received blatant misinformation on serious matters. When asking them about my allowed contribution limits, I got two terrible answers. First, they had no idea that a profit-sharing contribution reduces your available after-tax space by 2x (something that Spirit Rider talks about all the time). Even when I tried to explain this to them, they did not understand what I was talking about.

I also asked them to confirm my available contribution figures based on my business income. Because I have a W2 salary that exceeds the SS cap, my SE tax is only the Medicare portion. When I asked to confirm the figures, they insisted that didn't matter, using their online SE tax calculator as a source instead of my actual tax return.

But, I am setup with a mega-backdoor Roth and I value it, so I view their service as buying an IRS-approved plan document with MBR option.
Can you explain what is a "profit-sharing contribution" please? Is it contribution from annual performance based bonus? Or employer automatic contribution that does not require employee contributing?
I am trying NOT to max out my 401k (not solo 401k) before December, in order to get all the employer match.

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Wed Jun 12, 2019 9:05 am

bryansmile wrote:
Wed Jun 12, 2019 7:02 am
Can you explain what is a "profit-sharing contribution" please? Is it contribution from annual performance based bonus? Or employer automatic contribution that does not require employee contributing?

I am trying NOT to max out my 401k (not solo 401k) before December, in order to get all the employer match.
There are two types of employer contributions. Employer matches of employee contributions and employer non-elective contributions. An employer covering non-owner/spouse can offer match and/or a non elective contribution.

Non-elective contributions were originally the sharing of a portion of the company's profits. Even though they are rarely now structured as a portion the company's profits. The are often called profit sharing contributions. Those are the employer contributions in a one-participant 401k plan.

What @bryansmile was referring to was employer contributions for a self-employed individual reduce compensation. At lower self-employed earned income (business profit - 1/2 SE tax) levels, this can both reduce their annual addition limit and the remaining contribution space within that limit.

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Wed Jun 12, 2019 10:05 am

ef11 wrote:
Tue Jun 11, 2019 8:11 pm
I guess I should look for a good umbrella policy as well once this account begins to grow.
What you really need is to find a low cost Third Party Administrator (TPA) to run your plan.

People have been jumping on the mysolo401k option without knowing what they are doing. This is because they assume they can figure it out or will obtain enough guidance to be able to get the TPA done correctly. That assumption is clearly in question.

This solo 401k with mega-back door capabilities is a new (and promising) area of retirement planning. The recommendation from here has been to use a TPA unless you have previous experience in this area.

Here is an article that was part of the beginning of this movement. Note the last sentence.
  • "Readers not familiar with how to administer a 401k plan should go with a TPA for a modest cost. Laws and regulations are complex. There are many ways to mess up. Get professional help if you’d like to pursue this option."
https://thefinancebuff.com/after-tax-co ... -401k.html

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Wed Jun 12, 2019 3:12 pm

retiredjg wrote:
Wed Jun 12, 2019 10:05 am
ef11 wrote:
Tue Jun 11, 2019 8:11 pm
I guess I should look for a good umbrella policy as well once this account begins to grow.
What you really need is to find a low cost Third Party Administrator (TPA) to run your plan.

People have been jumping on the mysolo401k option without knowing what they are doing. This is because they assume they can figure it out or will obtain enough guidance to be able to get the TPA done correctly. That assumption is clearly in question.

This solo 401k with mega-back door capabilities is a new (and promising) area of retirement planning. The recommendation from here has been to use a TPA unless you have previous experience in this area.

Here is an article that was part of the beginning of this movement. Note the last sentence.
  • "Readers not familiar with how to administer a 401k plan should go with a TPA for a modest cost. Laws and regulations are complex. There are many ways to mess up. Get professional help if you’d like to pursue this option."
https://thefinancebuff.com/after-tax-co ... -401k.html
Well, this is what I was trying to do with MySolo401k. I figured $550 upfront and $125 a year was worth the peace of mind and ease of doing this all correctly. After the comments here, I see that may not be the case for more complex situations, but the $550 is already a sunk cost. I think for standard contributions and rollovers within the plan, they should be able to guide me without error (I can calculate how much to contribute on my own to be honest).
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Wed Jun 12, 2019 3:53 pm

ef11 wrote:
Wed Jun 12, 2019 3:12 pm
Well, this is what I was trying to do with MySolo401k. I figured $550 upfront and $125 a year was worth the peace of mind and ease of doing this all correctly.
Every plan has an administrator. MYsolo401k is not an administrator. They provide you with a non-prototype plan (for a cost) and keep the plan updated every year (for a cost). Administering the plan is not their job. So the administrator is now you. Do you know how to do that?

After the comments here, I see that may not be the case for more complex situations, but the $550 is already a sunk cost.
The plan itself would cost you that anyway. They have provided you with a plan that should pass IRS scrutiny. That is worth something. You have paid for it. Not really a sunk cost in my mind.

I think for standard contributions and rollovers within the plan, they should be able to guide me without error (I can calculate how much to contribute on my own to be honest).
I hope you are correct and I hope that is all you need to do.

Back to your original question, it could be foolish to roll your $200k into this plan until you have administered it yourself for several years and not messed up. Messing up could cause the entire plan to be distributed to you, taxable all in one year. I assume, but do not know for sure, that would include the $200k.

Good luck!

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Wed Jun 12, 2019 6:56 pm

retiredjg wrote:
Wed Jun 12, 2019 3:53 pm
ef11 wrote: ↑Wed Jun 12, 2019 2:12 pm
Well, this is what I was trying to do with MySolo401k. I figured $550 upfront and $125 a year was worth the peace of mind and ease of doing this all correctly.
Every plan has an administrator. MYsolo401k is not an administrator. They provide you with a non-prototype plan (for a cost) and keep the plan updated every year (for a cost). Administering the plan is not their job. So the administrator is now you. Do you know how to do that?
Ok that makes sense, so I would pay a TPA an additional fee to ensure I am doing it the right way. Their pitch was that they can do this for me, or at least they made it seem that this was an all-inclusive solution that needed no further administration.
retiredjg wrote:
Wed Jun 12, 2019 3:53 pm
After the comments here, I see that may not be the case for more complex situations, but the $550 is already a sunk cost.
The plan itself would cost you that anyway. They have provided you with a plan that should pass IRS scrutiny. That is worth something. You have paid for it. Not really a sunk cost in my mind.
Sunk cost just means it is something I have paid for and now cannot get my money back on, not that I wasted the money. I agree that I received something of value in three non-prototype accounts.
retiredjg wrote:
Wed Jun 12, 2019 3:53 pm
I think for standard contributions and rollovers within the plan, they should be able to guide me without error (I can calculate how much to contribute on my own to be honest).
I hope you are correct and I hope that is all you need to do.

Back to your original question, it could be foolish to roll your $200k into this plan until you have administered it yourself for several years and not messed up. Messing up could cause the entire plan to be distributed to you, taxable all in one year. I assume, but do not know for sure, that would include the $200k.
This certainly makes sense, I will make sure I get a few years of administrating the plan under my belt before doing this. Although it will mean more accounts to manage my AA in, overall the right call.

I really thought a ton of people were doing this and it would be straightforward and easy, but it appears that is not the case. I believe this will all work out for me in the long run, and I am optimistic the advantages of doing a Mega Backdoor Roth from age 27 on will leave me in a great place later in life.

Thanks for all of the suggestions
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Wed Jun 12, 2019 7:32 pm

ef11 wrote:
Wed Jun 12, 2019 6:56 pm
Ok that makes sense, so I would pay a TPA an additional fee to ensure I am doing it the right way. Their pitch was that they can do this for me, or at least they made it seem that this was an all-inclusive solution that needed no further administration.
I cannot comment with any sureness because I have not been involved in doing this myself.

The people I trust say that you need a third party administrator to administer your plan properly. The people I trust say that some of the information given out by your plan provider is not accurate and could get you into trouble. The people I don't know seem to think you can do it yourself.

So you can see the dilemma.

I really thought a ton of people were doing this and it would be straightforward and easy, but it appears that is not the case.
There are a bunch (maybe not a ton) of people doing this. They all think they can administer their own plans. Some will be right. Some will not be right. Those who are not right are going to get into a huge mess.

I believe this will all work out for me in the long run, and I am optimistic the advantages of doing a Mega Backdoor Roth from age 27 on will leave me in a great place later in life.
I think there is no question that the mega back door can be very beneficial in the long run. Whether you can administer a 401k plan with no prior experience and with support from people who may not know what they are doing is a different matter.

Go back and read the earlier posts. The people you are trusting may not be giving you reliable information. I don't mean they are crooked, just mistaken. That's OK if you can find the reliable information on your own. Are you prepared to do that? Do you have any idea how to do that?

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Wed Jun 12, 2019 9:06 pm

retiredjg wrote:
Wed Jun 12, 2019 3:53 pm
ef11 wrote:
Wed Jun 12, 2019 3:12 pm
I think for standard contributions and rollovers within the plan, they should be able to guide me without error (I can calculate how much to contribute on my own to be honest).
I hope you are correct and I hope that is all you need to do.
Are you sure you understand all of the intricacies of Mega Backdoor Roth contribution limits. There is no IRS publication or guidance directly covering contribution limits and none of the tax software properly calculate contribution limits. AND, it seems that mysolo401k has no clue how to apply the rules regarding the possible interaction between employer contributions and employee after-tax contributions.

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Thu Jun 13, 2019 8:18 am

retiredjg wrote:
Wed Jun 12, 2019 7:32 pm
ef11 wrote:
Wed Jun 12, 2019 6:56 pm
Ok that makes sense, so I would pay a TPA an additional fee to ensure I am doing it the right way. Their pitch was that they can do this for me, or at least they made it seem that this was an all-inclusive solution that needed no further administration.
I cannot comment with any sureness because I have not been involved in doing this myself.

The people I trust say that you need a third party administrator to administer your plan properly. The people I trust say that some of the information given out by your plan provider is not accurate and could get you into trouble. The people I don't know seem to think you can do it yourself.

So you can see the dilemma.
Yes, I do see a dilemma and I was under the impression MySolo401k would provide all of this to me with accuracy.
Spirit Rider wrote:
Wed Jun 12, 2019 9:06 pm
retiredjg wrote:
Wed Jun 12, 2019 3:53 pm
ef11 wrote:
Wed Jun 12, 2019 3:12 pm
I think for standard contributions and rollovers within the plan, they should be able to guide me without error (I can calculate how much to contribute on my own to be honest).
I hope you are correct and I hope that is all you need to do.
Are you sure you understand all of the intricacies of Mega Backdoor Roth contribution limits. There is no IRS publication or guidance directly covering contribution limits and none of the tax software properly calculate contribution limits. AND, it seems that mysolo401k has no clue how to apply the rules regarding the possible interaction between employer contributions and employee after-tax contributions.
I really believe this to be very straightforward. I work with a CPA to calculate exactly what deductible contributions I can make as an employEE and an employER. From there, I do not see how it isn't simply $56,000 minus that amount for the after-tax contribution.

I did find the below TPA that would be around $400 in year one. If I could just use them for a year or two I would be on board, but really don't want to pay every year as my contributions should be very straight forward.

https://www.employeefiduciary.com/401k-plan-pricing
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Thu Jun 13, 2019 10:21 am

ef11 wrote:
Thu Jun 13, 2019 8:18 am
Spirit Rider wrote:
Wed Jun 12, 2019 9:06 pm
Are you sure you understand all of the intricacies of Mega Backdoor Roth contribution limits. There is no IRS publication or guidance directly covering contribution limits and none of the tax software properly calculate contribution limits. AND, it seems that mysolo401k has no clue how to apply the rules regarding the possible interaction between employer contributions and employee after-tax contributions.
I really believe this to be very straightforward. I work with a CPA to calculate exactly what deductible contributions I can make as an employEE and an employER. From there, I do not see how it isn't simply $56,000 minus that amount for the after-tax contribution.
That is precisely the problem, you do not know what you do not know.

First, are you aware that the maximum employer contribution may not be 20% of self-employed earned income (business profit - 1/2 SE tax)? Are you aware that there are actually two components of the annual addition limits? The statutory limit (2019 = $56K) and the 100% of compensation limit. However, because self-employed employer contribution are NOT compensation, they both reduce compensation and reduce annual addition space. In the latter case the maximum employer contribution could be your (self-employed earned income - employee elective contributions) / 2. This is reflected in the IRS Publication 560, Table and Worksheets for the Self-Employed, page 22, Deduction Worksheet for Self-Employed, steps, 9 - 13. This is correctly calculated by tax software and some online calculators, but many online calculators do not take this into account and could give you an incorrect result.

Second, are you aware that 403b annual additions must be aggregated with the annual additions from employer plans of businesses owned > 50% by you? See IRS Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations, Chapter 3 , Limit on Annual Additions, page 4. So for self-employed individuals who make or receive 403b contributions. Applying the statutory annual addition limit, the maximum employer contribution is (2019 = $56K) - 403b annual additions - i401k (employer elective - (employer contributions * 2)). IRS Pub 560, tax software and almost all online calculators does not take this is to account. I am only aware of one online calculator that takes this into account.

Finally, let's combine the two issues. let's include and solve for employee after-tax contributions in the formulas. The maximum employee after-tax contribution is the lessor of:
  • The statutory limit: (2019 = $56K) - 403b annual additions - i401k (employee elective contributions + (employer contributions * 2))
  • The 100% of compensation limit: Self-employed income - i401k (employee elective contributions + (employer contributions * 2))
There is only one online calculator that correctly calculates this. Also, few CPAs or financial planners are aware of these nuances. As we already know, this even applies to online custom 401k plan providers and even some TPAs.

zrail
Posts: 53
Joined: Sun Jan 28, 2018 9:18 am

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by zrail » Thu Jun 13, 2019 11:34 am

All of this is making me strongly consider winding down my solo 401k (documents from mysolo401k.net). I don’t foresee contributing to it at any point in the next 5-10 years and I just have a single fund in it right now. My next employer’s 401k has a brokerage window so maybe I’ll just roll it all into that.

Topic Author
ef11
Posts: 219
Joined: Sat Mar 10, 2012 10:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by ef11 » Thu Jun 13, 2019 2:52 pm

zrail wrote:
Thu Jun 13, 2019 11:34 am
All of this is making me strongly consider winding down my solo 401k (documents from mysolo401k.net). I don’t foresee contributing to it at any point in the next 5-10 years and I just have a single fund in it right now. My next employer’s 401k has a brokerage window so maybe I’ll just roll it all into that.
Yes, I am stuck between being suicidal and what are my chances of being audited...
Spirit Rider wrote:
Thu Jun 13, 2019 10:21 am
ef11 wrote:
Thu Jun 13, 2019 8:18 am
Spirit Rider wrote:
Wed Jun 12, 2019 9:06 pm
Are you sure you understand all of the intricacies of Mega Backdoor Roth contribution limits. There is no IRS publication or guidance directly covering contribution limits and none of the tax software properly calculate contribution limits. AND, it seems that mysolo401k has no clue how to apply the rules regarding the possible interaction between employer contributions and employee after-tax contributions.
I really believe this to be very straightforward. I work with a CPA to calculate exactly what deductible contributions I can make as an employEE and an employER. From there, I do not see how it isn't simply $56,000 minus that amount for the after-tax contribution.
That is precisely the problem, you do not know what you do not know.
Well i said I was planning to work with a CPA and could hire the TPA as well, but you are saying even that is not enough? Is your argument that no one should utilize a Solo 401k? I'm not sure what your recommendation is here. I could use a SEP, but I assume some of the contribution rules around employEE/ER contributions are similar. I could just use a standard TIRA and contribute only $6,000 a year. Not sure what better option I have than the Solo 401k.
Spirit Rider wrote:
Thu Jun 13, 2019 10:21 am
First, are you aware that the maximum employer contribution may not be 20% of self-employed earned income (business profit - 1/2 SE tax)? Are you aware that there are actually two components of the annual addition limits? The statutory limit (2019 = $56K) and the 100% of compensation limit. However, because self-employed employer contribution are NOT compensation, they both reduce compensation and reduce annual addition space. In the latter case the maximum employer contribution could be your (self-employed earned income - employee elective contributions) / 2. This is reflected in the IRS Publication 560, Table and Worksheets for the Self-Employed, page 22, Deduction Worksheet for Self-Employed, steps, 9 - 13. This is correctly calculated by tax software and some online calculators, but many online calculators do not take this into account and could give you an incorrect result.
If this is correctly calculated by tax software, I don't think this should be an issue. One of the calculators I have been using that I like is in the following link (not my info typed in): https://docs.zoho.com/sheet/published.d ... 140934898a
Spirit Rider wrote:
Thu Jun 13, 2019 10:21 am
Second, are you aware that 403b annual additions must be aggregated with the annual additions from employer plans of businesses owned > 50% by you? See IRS Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations, Chapter 3 , Limit on Annual Additions, page 4. So for self-employed individuals who make or receive 403b contributions. Applying the statutory annual addition limit, the maximum employer contribution is (2019 = $56K) - 403b annual additions - i401k (employer elective - (employer contributions * 2)). IRS Pub 560, tax software and almost all online calculators does not take this is to account. I am only aware of one online calculator that takes this into account.

Finally, let's combine the two issues. let's include and solve for employee after-tax contributions in the formulas. The maximum employee after-tax contribution is the lessor of:
The statutory limit: (2019 = $56K) - 403b annual additions - i401k (employee elective contributions + (employer contributions * 2))
The 100% of compensation limit: Self-employed income - i401k (employee elective contributions + (employer contributions * 2))
There is only one online calculator that correctly calculates this. Also, few CPAs or financial planners are aware of these nuances. As we already know, this even applies to online custom 401k plan providers and even some TPAs.
I don't see how a 403b is relevant to my situation. I will be making 100% 1099 income moving forward and have never had a 403b. So the only issue is the first one, which tax software will calculate accurately.
45% Vang Inst 500 IDX ER .01% | 10% Vang Inst Ext Mkt ER .04% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .03% | 10% Fidelity MSCI Real Estate ER 0.084%

retiredjg
Posts: 36265
Joined: Thu Jan 10, 2008 12:56 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by retiredjg » Thu Jun 13, 2019 3:14 pm

ef11 wrote:
Thu Jun 13, 2019 2:52 pm
Yes, I am stuck between being suicidal and what are my chances of being audited...
Just hire the TPA and use them a few years and reevaluate then. Consider it the cost of getting so much money into Roth IRA (a very nice benefit).


I don't think anybody here would say not to use the plan you already have. I don't think anyone is casting any doubts on the plan itself. The only thing lacking is an administrator..so pay a professional TPA to do it.

That's what other employers do - they either hire a TPA or send their own staff off for proper training.

Spirit Rider
Posts: 10635
Joined: Fri Mar 02, 2007 2:39 pm

Re: Left MegaCorp, Disadvantages to Rolling 401K & Pension to Self-Directed Solo 401K?

Post by Spirit Rider » Thu Jun 13, 2019 5:53 pm

ef11 wrote:
Thu Jun 13, 2019 2:52 pm
I really believe this to be very straightforward. I work with a CPA to calculate exactly what deductible contributions I can make as an employEE and an employER. From there, I do not see how it isn't simply $56,000 minus that amount for the after-tax contribution
Spirit Rider wrote:
Wed Jun 12, 2019 9:06 pm
That is precisely the problem, you do not know what you do not know.
ef11 wrote:
Thu Jun 13, 2019 2:52 pm
Well i said I was planning to work with a CPA and could hire the TPA as well, but you are saying even that is not enough? Is your argument that no one should utilize a Solo 401k? I'm not sure what your recommendation is here.
I am not saying that anyone should not use a one-participant 401k plan with a custom document. My point was that the maximum employee after tax contributions is NOT necessarily simply $56,000 minus that amount for the after-tax contribution.
Spirit Rider wrote:
Thu Jun 13, 2019 10:21 am
First, are you aware that the maximum employer contribution may not be 20% of self-employed earned income (business profit - 1/2 SE tax)?This is correctly calculated by tax software and some online calculators, but many online calculators do not take this into account and could give you an incorrect result.
ef11 wrote:
Thu Jun 13, 2019 2:52 pm
If this is correctly calculated by tax software, I don't think this should be an issue. One of the calculators I have been using that I like is in the following link (not my info typed in): https://docs.zoho.com/sheet/published.d ... 140934898a
The maximum employer contribution is calculated by tax software, but the maximum employer elective contribution may not be if such contributions are made to a W-2 employer and the maximum employee after-tax contributions never are. Your link to Finance Buff's spreadsheet is the one place I have seen that properly calculates all factors, but even he will tell you to understand the underlying calculations even if you hire someone who does. Call me cynical, but the Mega Backdoor Roth is so recent (especially for one-participant 401k plans), I don't even trust that all CPAs, CFPs and TPAs understand the nuances.
Spirit Rider wrote:
Thu Jun 13, 2019 10:21 am
Second, are you aware that 403b annual additions must be aggregated with the annual additions from employer plans of businesses owned > 50% by you? Finally, let's combine the two issues. let's include and solve for employee after-tax contributions in the formulas. The maximum employee after-tax contribution is the lessor of:
  • The statutory limit: (2019 = $56K) - 403b annual additions - i401k (employee elective contributions + (employer contributions * 2))
    The 100% of compensation limit: Self-employed income - i401k (employee elective contributions + (employer contributions * 2))
ef11 wrote:
Thu Jun 13, 2019 2:52 pm
I don't see how a 403b is relevant to my situation. I will be making 100% 1099 income moving forward and have never had a 403b. So the only issue is the first one, which tax software will calculate accurately.
I didn't say the 403b issue is relevant to your situation. The effect of employer elective contributions to a W-2 employer might not affect you either, but this is not a private chat, this a public forum. There are many people reading threads and these issues might affect them. My purpose in these replies is not to dissuade anyone, but to educate.

There has been this rush of people adopting one-participant 401k plans with custom documents for the Mega Backdoor Roth and not understanding that this is not just a bigger IRA. They are first and foremost full fledged 401k plans with minor exceptions for owners and optionally their spouses. I am just trying to be helpful and prevent people from making serious 401k plan errors. One thing to keep in mind is that plan errors have no Statute of Limitations and can literally leave plans "SOL" many years into the future, if you catch my drift.

One participant 401k plan administration with a custom plan document utilizing the Mega Backdoor Roth is not that difficult, but it is not trivial. Just be sure your understand the details.

Post Reply