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Both SEP IRA and Solo 401K at Vanguard - Considering Backdoor - What to do...

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  • Both SEP IRA and Solo 401K at Vanguard - Considering Backdoor - What to do...

    1. I have a $200K SEP IRA at Vanguard. I have been considering rolling it over into a Solo 401K, which I also currently have at Vanguard, so I can do a back door Roth. The problem is that Vanguard won’t roll over an IRA onto a 401K and I can’t have 2 solo 401Ks at the same time. That means I can’t just roll over the SEP at another broker. I believe I would have to move my solo 401K as well as the SEP to accomplish this. Would it be worth is to transfer my account to e-trade to complete the roll over and move back to Vanguard where all my other accounts are? Would e-trade charge me a fee for the fund transfers? I know Vanguard won't.

    2. Another consideration is that a financial advisor once told me that there is some penalty once you exceed a certain dollar amount in a Solo 401K. Anybody know anything about that?

    3. Is it worth all the hassle? Can’t I just start adding money to traditional IRAs for my wife and I with no Roth roll over after I max out my solo 401K, thus avoiding pro rata distribution?

  • #2
    For one business you can’t have two solo 401ks.

    You also can’t maintain a 5305 SEP IRA and a solo 401k for the same business. They’re both qualified plans. And Vanguard SEPs are 5305 SEPs.

    So you’re already in a situation where you need to fix a problem. Assuming both plans are from the same business.

    How long have you had both plans?

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    • #3
      jacoavlu My understanding is that I can keep the old SEP IRA as long as I'm only contributing to the solo 401K (I.e. I can't contribute to both in the same year, but I can HAVE both.). Is that not accurate? Vanguard did allow me to roll over the SEP IRA and then helped me to set up the Solo 401K. Why would they let me do that if I can't? Both plans are from the same business. I got the Solo 401 in January of this year. I had the SEP IRA a few years prior.

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      • #4
        jacoavlu I transferred the SEP to Vanguard from Raymond James. I have no idea if this was done with a 5305 form or not. I'm also not sure how to find out.

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        • #5
          I don’t know. But what I would do if I were you. Move my solo 401(k) to E*TRADE. That’s not an account transfer. That’s actually an amendment of your plan, using E*TRADE plan document. The Vanguard solo 401(k) then is closed. I would then roll over SEP Ira to the E*TRADE solo 401(k). And I would leave the solo 401(k) at E*TRADE. They have a perfectly fine plan and they offer many Vanguard mutual funds and ETFs along with many other excellent investment choices.There is really no reason to keep a solo 401(k) at Vanguard.

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          • #6
            Regarding an earlier point. There is certainly never a penalty for having any certain dollar amount within a solo 401(k). Once plan assets exceed $250,000 at the end of a year, there is a requirement to file IRS form 5500. But no penalties or fees.

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            • #7
              Vanguard does not accept rollovers into their Solo 401(k)s.

              You're probably going to have to move your Solo 401(k) to a custodian that will permit rollovers. That, or paying for a $200,000 Roth Conversion, are the only ways to avoid the SEP causing pro-rate problems with Backdoor Roth strategy.

              There is no penalty, but at a certain point, you have to file a 5500 with the IRS.

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              • #8
                It is possible that you no longer have a SEP Ira but rather a rollover traditional Ira. Do you know?

                Still doesn’t change what I would do. The Vanguard solo 401(k) does not except a rollover. I would move it to someplace that does.

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                • #9


                  You’re probably going to have to move your Solo 401(k) to a custodian that will permit rollovers. That, or paying for a $200,000 Roth Conversion, are the only ways to avoid the SEP causing pro-rate problems with Backdoor Roth strategy.
                  Click to expand...


                  Paying taxes on a $200,000 has got to be off the table. There is no way paying taxes on that sum would allow me to benefit from having a Roth. I'm certain that would be a net loss defeating the purpose of having the back door Roth.

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                  • #10


                    There is really no reason to keep a solo 401(k) at Vanguard.
                    Click to expand...


                    There is one reason. I have all my other accounts at Vanguard. I wonder what it would cost to transfer back to Vanguard from E*TRADE. I know Vanguard won't charge anything for transfers.

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                    • #11
                      Having all your other accounts at Vanguard is not a good enough reason to amend and transfer your one-participant 401k plan twice in succession. Why would you want to reward Vanguard for having this ridiculous policy. Not to mention, Vanguard does not allow employee eligibility restrictions. If enough people vote with their feet giving a clear reason for doing so, maybe they will change their policies.

                      I agree 100% with @jacoavlu. Etrade, TD Ameritrade, Fidelity and Schwab are all perfectly fine if not better options for a one-participant 401k. Why not just amend your one-participant plan to one of them, transfer the assets, rollover the SEP IRA and be done.

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                      • #12
                        spiritrider @jacoavlu.Okay, one last thought before I go through with all these transfers. The Solo 401K does have an employee contribution option of putting money in a Roth 401K. Therefore I could put $6000 in the Roth 401K portion, the remaining $13,000 in the traditional employee 401K (total $19K for 2019) and I could put an additional $6K into a traditional IRA. Any thoughts on this idea instead?

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                        • #13
                          jacoavlu I called Vanguard and they say the SEP is considered a closed account as long as I don't add any money to it. Do you agree with that?

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                          • #14
                            That sounds reasonable. But what does that change? You have an IRA you need to move to clear a path for backdoor Roths.

                            Having your other accounts at Vanguard hardly matters. Vanguard small business is even a separate login.

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                            • #15




                              jacoavlu I called Vanguard and they say the SEP is considered a closed account as long as I don’t add any money to it. Do you agree with that?
                              Click to expand...


                              The Vanguard rep is technically incorrect, but it is a difference without a distinction. A SEP IRA plan is considered inactive and not "maintained" for a tax year you do not make contributions. The SEP IRA account is not "closed" until its balance is $0 and the custodian chooses to close it.

                              The bottom line is, no 5305-SEP contributions for a given tax year, no interference with a one-participant 401k plan for that tax year.

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