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SEP-IRA – where to open, features to look for

Home Retirement Accounts SEP-IRA – where to open, features to look for

  • Avatar CFEonline 
    Participant
    Status: Physician
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    Joined: 09/05/2018

    I have read quite a bit about solo 401k and where to open them on this site and forum. For that account there are several important considerations that vary between companies, such as Roth option, after tax contribution with in service distribution for mega backdoor, accepting rollovers, loans, etc.

    With regards to SEP-IRA, what are the important considerations to look for? I know several of the things you can do with a solo 401k like loans are not an option with SEP-IRA. What are things that you can do that you should make sure a SEP-IRA allows? Is it fairly standard that any SEP-IRA would allow me to roll the funds out into a solo 401k each year?

    Thanks in advance.

    #190334 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
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    Joined: 05/13/2011

    First, why would you open a SEP-IRA instead of a solo 401(k)? That’s rarely a good idea for a doc.

    Yes, rollovers are pretty standard with a SEP-IRA. The only one I’ve ever had was at Vanguard because I wanted no fees and good investment options.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #190337 Reply
    Liked by Peds
    Avatar Peds 
    Participant
    Status: Physician
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    Joined: 01/08/2016
    With regards to SEP-IRA, what are the important considerations to look for?

    Click to expand…

    that it blocks the backdoor rIRA thus making it a much inferior product, and should be avoided.

    #190388 Reply
    Liked by CordMcNally
    CordMcNally CordMcNally 
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    I’d look for a solo 401k, mainly for the backdoor Roth issue alone.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #190415 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
    Posts: 103
    Joined: 09/05/2018

    Acknowledging that 401k is superior, if one is in a situation where SEP-IRA will be used regardless, any input or experience with the various custodians for this type of account? I was leaning toward e-trade because when looking at potential custodians for solo 401k I thought they came out ahead, but perhaps will try Vanguard since several of the features they don’t offer in a solo 401k aren’t even options for SEP-IRA.

    #190787 Reply
    Kon Litovsky Kon Litovsky 
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    Acknowledging that 401k is superior, if one is in a situation where SEP-IRA will be used regardless, any input or experience with the various custodians for this type of account? I was leaning toward e-trade because when looking at potential custodians for solo 401k I thought they came out ahead, but perhaps will try Vanguard since several of the features they don’t offer in a solo 401k aren’t even options for SEP-IRA.

    Click to expand…

    Do you have a SEP plan set up for the practice and you are opening individual SEP account?  That’s what this sounds like.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #190820 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
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    Do you have a SEP plan set up for the practice and you are opening individual SEP account?  That’s what this sounds like.

    Click to expand…

    This inquiry is in regards to a SEP-IRA I will have as an employee of a group, which has elected to use SEP-IRA as retirement vehicle for the group. However, each individual sets up their own account at the brokerage of their choice. That is consistent with my reading of how the SEP-IRA would work in a group structure like this I believe, and is not an individual SEP account (ie not from self employed income).

    Set up a SEP-IRA for each employee

    A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.”  https://www.irs.gov/retirement-plans/establishing-a-sep

     

    As a side note, in this structure would I be correct in understanding the group as the employer is the controlled group, and so if I also had a side job and generated 1099 income as an individual I would be eligible for opening a solo 401k and could fill up to the $56,000 limit (elective deferral, profit share, then non-roth after tax contributions with a custom plan document), on top of filling the SEP-IRA through the group to $56,000 through employer contributions at % of income, if I choose to?

    #190822 Reply
    Kon Litovsky Kon Litovsky 
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    Do you have a SEP plan set up for the practice and you are opening individual SEP account?  That’s what this sounds like. 

    Click to expand…

    This inquiry is in regards to a SEP-IRA I will have as an employee of a group, which has elected to use SEP-IRA as retirement vehicle for the group. However, each individual sets up their own account at the brokerage of their choice. That is consistent with my reading of how the SEP-IRA would work in a group structure like this I believe, and is not an individual SEP account (ie not from self employed income).

    Set up a SEP-IRA for each employee

    A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.”  https://www.irs.gov/retirement-plans/establishing-a-sep

     

    As a side note, in this structure would I be correct in understanding the group as the employer is the controlled group, and so if I also had a side job and generated 1099 income as an individual I would be eligible for opening a solo 401k and could fill up to the $56,000 limit (elective deferral, profit share, then non-roth after tax contributions with a custom plan document), on top of filling the SEP-IRA through the group to $56,000 through employer contributions at % of income, if I choose to?

    Click to expand…

    Yes, you should be able to open a solo 401k on the side.  I’m just not sure what a SEP for the group would accomplish.  You can not do backdoor Roth, or any Roth for that matter (given that Roth has gained significant value with the new tax law), does not allow catch-up contributions, you can’t do a Cash Balance plan unless you have an individually designed SEP document, and administration is in the hands of the group, which sounds like a total nightmare given that nobody has access to individual accounts to verify that everything is in order.  Also, I’m not sure how much asset protection SEP affords (most likely only within the limits of the state where you are in, which can be limited by as low as $1M in many states and possibly other limitations), so all in all SEP sounds like a poor choice for a retirement plan for a group of any size.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #190823 Reply
    Kon Litovsky Kon Litovsky 
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    By the way, if the plan has an individually designed SEP document, you can’t just open a retail SEP the type that Vanguard offers.  I bet you would have to open a VRIP account and set up a SEP as an individual brokerage account using your plan document. This is how self-directed brokerage accounts are opened for a 401k plan, so I wouldn’t expect anything different.  Your plan sponsor should be setting these accounts up for you as it does take some paperwork to set it up if you open individual brokerage account.  Another reason why I don’t like SDBAs or individual brokerage accounts whether SEP or 401k.  That said, all providers offer these, whether Fidelity, TD, etc, but the features of your SEP would be dictated solely by your plan document, while investments can be anything, so the choice is rather easy – you can pick whatever SDBA you like to make your life easier, and there isn’t a lot of practical differences other than with Vanguard you have zero cost to buy Admiral shares of funds while other SDBAs have their own lists that can be purchased with no commission.

    In short, I would confirm with the plan sponsor about the type of account that you should be opening, and this will make your choices much easier.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #190827 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
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    Joined: 09/05/2018

    Thank you for the information, I will check in with them. I agree the 401k has several benefits over SEP structure and if I had been setting it up may have chosen that instead. My current plan is just to roll the SEP balance into my solo 401k annually once I get that going, which will open the door for back door Roth (I will probably just make the IRA contributions for the next year or two to tradditional IRA, then once I transfer the SEP IRA to solo 401k, roll the 1-2 years worth of trad IRA all over into Roth. This should provide the asset protection desired once moved to the solo 401k correct? And as I understand it, it is standard the SEP should allow the funds to be rolled over to 401k as often as desired (unlike a typical employer sponsored 401k which is stuck where it is until you separate from the employer)? It’s a bit round about but doesn’t seem like it will be too cumbersome to do annually.

    #190838 Reply
    Kon Litovsky Kon Litovsky 
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    Joined: 01/09/2016

    Thank you for the information, I will check in with them. I agree the 401k has several benefits over SEP structure and if I had been setting it up may have chosen that instead. My current plan is just to roll the SEP balance into my solo 401k annually once I get that going, which will open the door for back door Roth (I will probably just make the IRA contributions for the next year or two to tradditional IRA, then once I transfer the SEP IRA to solo 401k, roll the 1-2 years worth of trad IRA all over into Roth. This should provide the asset protection desired once moved to the solo 401k correct? And as I understand it, it is standard the SEP should allow the funds to be rolled over to 401k as often as desired (unlike a typical employer sponsored 401k which is stuck where it is until you separate from the employer)? It’s a bit round about but doesn’t seem like it will be too cumbersome to do annually.

    Click to expand…

    I would verify that you can do rollovers from the SEP.  For that just get a copy of the SEP plan document and find out what it allows and what it does not allow. It is not standard by any means if there is an individually designed document.  The rules that apply to 401k plans don’t permit any in-plan rollovers of salary deferral/safe harbor match for example, and those are IRS rules, not plan rules.  SEP on the other hand can allow rollovers, but this has to be explicitly stated in the plan document.

    Solo 401k does not necessarily afford more asset protection than the SEP, unfortunately, because it also falls under state laws, not federal.  So you need to check the state law for your specific state to find out what rules apply to IRAs and solo 401k plans (as those can have some differences as well).

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #190843 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1783
    Joined: 02/01/2016

    There is one potential benefit of a SEP IRA for a physician only partnership with incomes >= the compensation limit 2019 = $280K.

    It allows the moonlighting businesses of the partners to max out the annual addition limit (2019 = $56K) at a much lower income limit with a one-participant 401k. $56K – $19K = $37K / 20% = $185K net self-employment earnings.

    I would recommend that the OP open the SEP IRA for the group plan and the one-participant 401k at the same custodian that allows rollovers (not Vanguard). They can then rollover any SEP IRA contributions to the one-participant 401k as soon as they are made.

    Therefore, the OP should only be concerned with the characteristics of the one-participant 401k. The SEP IRA can just be temporary recipient of the SEP IRA contributions.

    #190865 Reply
    Kon Litovsky Kon Litovsky 
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    Status: Financial Advisor
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    There is one potential benefit of a SEP IRA for a physician only partnership with incomes >= the compensation limit 2019 = $280K.

    It allows the moonlighting businesses of the partners to max out the annual addition limit (2019 = $56K) at a much lower income limit with a one-participant 401k. $56K – $19K = $37K / 20% = $185K net self-employment earnings.

    I would recommend that the OP open the SEP IRA for the group plan and the one-participant 401k at the same custodian that allows rollovers (not Vanguard). They can then rollover any SEP IRA contributions to the one-participant 401k as soon as they are made.

    Therefore, the OP should only be concerned with the characteristics of the one-participant 401k. The SEP IRA can just be temporary recipient of the SEP IRA contributions.

    Click to expand…

    That’s true, but that shouldn’t be the driver for opening SEPs for group practice plans 😉  Chances are this is a very old plan as groups nowadays rarely if ever open SEPs (unless they get bad advice to start with).  If you have a physician only group, you can do 100% profit sharing without a 401k contribution, and then you can still max out solo 401k plans on the side.  This might be possible to do on an individual basis as well in a 401k with profit sharing. Also, we still don’t know whether SEP plan doc allows outgoing rollovers, so until we know that, we don’t know for sure that this can even work.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #191080 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1783
    Joined: 02/01/2016

    Kon, you make some good points. I wasn’t suggesting that a SEP IRA is the best choice for a new plan. However, the OP has indicated that this is what is available to them.

    I was simply pointing out that if the OP’s compensation is >= the limit, they can maximize the annual addition limit with employer contributions. They can then rollover any SEP IRA balances to a one-participant 401k by 12/31 to keep a fully efficient Backdoor Roth open.

    A SEP IRA plan has no ability to restrict rollovers. Each and every SEP IRA account is fully under the control of the account owner. Once contributions are received, distribution options are 100% the same as a traditional IRA. The account owner can rollover the assets immediately.

    #191156 Reply
    Kon Litovsky Kon Litovsky 
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    Status: Financial Advisor
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    Kon, you make some good points. I wasn’t suggesting that a SEP IRA is the best choice for a new plan. However, the OP has indicated that this is what is available to them.

    I was simply pointing out that if the OP’s compensation is >= the limit, they can maximize the annual addition limit with employer contributions. They can then rollover any SEP IRA balances to a one-participant 401k by 12/31 to keep a fully efficient Backdoor Roth open.

    A SEP IRA plan has no ability to restrict rollovers. Each and every SEP IRA account is fully under the control of the account owner. Once contributions are received, distribution options are 100% the same as a traditional IRA. The account owner can rollover the assets immediately.

    Click to expand…

    Well, that’s the issue.  A SEP IRA custom plan document does have the ability to restrict rollovers, and while they are allowed by the IRS, they don’t have to be allowed by the plan document.  At least that’s my understanding of the custom design SEP plans.  That’s why I asked OP to verify this by getting a copy of the plan doc.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #191159 Reply

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