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Both SEP IRA and Solo 401K at Vanguard – Considering Backdoor – What to do…

Home Retirement Accounts Both SEP IRA and Solo 401K at Vanguard – Considering Backdoor – What to do…

  • Avatar SteffanW 
    Participant
    Status: Advanced Practice Provider
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    Joined: 01/24/2019
    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.

    Click to expand…

    What about the costs associated with funding my investments at these other brokers? At Vanguard I can purchase all funds/ETFs in my account: VTSAX, VTMGX, VSMAX, VSIAX, VVIAX and VOO for free. Can I do the same with E*TRADE, TD Ameritrade, Fidelity or Schwab?

    #231544 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
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    Joined: 03/01/2018

    You can’t purchase ETFs in a solo 401k at Vanguard. Far as I know.

    E*TRADE has lots of Vanguard mutual funds and ETFs available for no trade fees. You can use their site to see what’s available. Lots of no fee index products from other brokerages available there also.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #231553 Reply
    Liked by Peds, SteffanW
    Avatar SteffanW 
    Participant
    Status: Advanced Practice Provider
    Posts: 88
    Joined: 01/24/2019

    I called E*TRADE and they went through each of those tickers I mentioned. $0 fees for all of them. Also, they will give me $1,200 for transferring an account between $500,000-$1,000,000. I asked how they are making money on me at all. They guy said that they aren’t. I can’t believe it. It seems too good to be true, which always makes me a little skeptical. I’m having a lot of trouble finding one good reason not to do this.

    #231576 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    go ahead and keep looking for a reason

    Vanguard fanboy here too. But I have accounts at Etrade also and have referred several colleagues there. We all get yearly deposit bonuses. I hesitate to see how they make money off me as well. But I don’t lose sleep over it.

    Last year when I was doing some tax loss harvesting with market turmoil. I discovered those no fee funds will have short term trading fees. Emailed my Etrade rep and he immediately gave me a small account credit to reimburse trade fees. No questions asked.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #231590 Reply
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    Avatar SteffanW 
    Participant
    Status: Advanced Practice Provider
    Posts: 88
    Joined: 01/24/2019
    Last year when I was doing some tax loss harvesting with market turmoil. I discovered those no fee funds will have short term trading fees.

    Click to expand…

    Were did you find the short term fees? In your transaction history? In your statement? Were they labeled as “fee” or hidden somehow?

    #231597 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    I don’t recall. Probably saw the trade fee listed when I went to make the trade. Inconsequential.

    https://us.etrade.com/what-we-offer/pricing-and-rates

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #231606 Reply
    Avatar nievesfj 
    Participant
    Status: Dentist
    Posts: 3
    Joined: 09/10/2019

    Can someone confirm that one self-employed business cannot have a i401k and SEP-IRA? IRS website suggests it can be done. It states that a business cannot have 2 SEP-IRAs.

    #245083 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Can someone confirm that one self-employed business cannot have a i401k and SEP-IRA? IRS website suggests it can be done. It states that a business cannot have 2 SEP-IRAs.

    Click to expand…

    a self employed business could maintain a one participant 401k and a prototype SEP IRA.

    a self employed business could not maintain a one participant 401k and a 5305 SEP IRA.

    Most SEP IRAs are 5305 SEP IRAs.

    Schwab offers a prototype SEP IRA.

    There are not very many scenarios where one would find an advantage to maintain both.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #245093 Reply
    Liked by spiritrider, Peds
    Avatar nievesfj 
    Participant
    Status: Dentist
    Posts: 3
    Joined: 09/10/2019

    Thank you for your response. Why wouldn’t it be advantageous to maintain both?

    #245105 Reply
    Avatar jacoavlu 
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    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Maintaining both does not result in any increased contribution amount, compared with just a 401k alone

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #245107 Reply
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    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    Can someone confirm that one self-employed business cannot have a i401k and SEP-IRA? IRS website suggests it can be done. It states that a business cannot have 2 SEP-IRAs.

    Click to expand…

    A single employer can not have a 401k and a SEP IRA, but an individual can have a SEP IRA from another employer and an individual 401k. Also, as already mentioned you can have a one participant 401k and a prototype SEP or an individually designed SEP.

    Where do you see the IRS site saying that you can not have 2 SEP IRAs? The SEP Plan FAQs – Establishing a SEP says otherwise.

    If I have a SEP, can I also have other retirement plans?

    You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

    Form 5305-SEP also states:

    When not to use Form 5305-SEP. Do not use this form if you: 1. Currently maintain any other qualified retirement plan. This does not prevent you from maintaining another SEP.

    Your maximum employer contribution limit applies to all Defined Contribution (DC) plans controlled by the same or affiliated employers. The same is true for the annual addition limit. Bottom line, as stated by @jacoavlu, even with both a SEP IRA and a one-participant 401k. You get no more contribution space than with just a one-participant 401k.

    #245117 Reply
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    Avatar nievesfj 
    Participant
    Status: Dentist
    Posts: 3
    Joined: 09/10/2019

    Ok this makes sense. At the time of reading the IRS website, I didn’t know the different types of SEPs. So basically, set up an i401k or a SEP IRA, there isn’t a tax advantage to go through the trouble of maintaining both.

    #245130 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    There is tax advantage to a 401k over a SEP

    1. The ability to make elective deferral contributions
    2. One can reach the annual addition limit with overall lower net self employment earnings
    3. No interference with a backdoor Roth IRA

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #245140 Reply
    Liked by Tim, spiritrider

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