[Editor's Note: Konstantin Litovsky has written before about the merits of a “pooled 401(k) plan.” In this post, he talks about the benefits of a customized pooled plan for your individual 401(k) (also called a Solo 401(k)). You can learn more about choosing an individual 401(k) with this post published a year and a half ago. He titled this post: Turn Your Vanguard Solo 401(k) into the Perfect 401(k) for next to nothing.]
By Konstantin Litovsky, Guest Writer
Why Vanguard?
Vanguard offers low cost Admiral Shares and has the best selection of index funds available. In addition, Vanguard offers a brokerage account with all of the Vanguard ETFs available commission-free. If most of your accounts are opened with Vanguard, having to open a ‘solo’ 401k at another provider can be somewhat of a burden. Unfortunately, compared with other ‘solo’ 401k plans, the one offered by Vanguard is not the best available for various reasons.
Vanguard ‘Solo’ 401(k)
Vanguard plan document for its ‘solo’ 401k plan does not allow incoming rollovers, so you can’t move an existing traditional IRA or an old 401k plan into your ‘solo’ 401k. Vanguard also limits investments in its ‘solo’ 401k to Investor Shares only, and the brokerage option is not available. Once the assets are above $250k, form 5500 has to be filled out and filed with the IRS, which is something that has to be done for all ‘solo’ 401k plans.
The Ideal ‘Solo’ 401(k)
If we had to design a ‘solo’ 401k plan from scratch, what features would we want to include? For one thing, making a Backdoor Roth contribution is a given for most physicians, so we want to be able to roll any of our existing IRAs (and old 401k/403b/457b plans) into our ‘solo’ 401k. We would also want to have the brokerage option to have the ability to purchase ETFs, especially if we want to build a multi-asset class portfolio. It takes as much as $500k to implement a 12 asset class portfolio using Admiral Shares, yet it takes as little as $10k to build a similar portfolio using low cost ETFs, and the ETF portfolio will have the same overall expense ratio (around 0.12%) as the $500k Admiral Shares portfolio. There is another feature that might prove valuable if you want to pursue the Mega Roth strategy. As of 2014, IRS allows in-plan Roth conversion of tax-deferred contributions and rollover assets regardless of how old you are, and this would be possible if outgoing transfers are allowed, so you can now have one giant Mega Roth right inside your ‘solo’ 401k. A ‘solo’ 401k account at Vanguard or at any other brokerage will use a standard plan document that cannot be changed. However, there is a way you can have all of these features enabled in your ‘solo’ 401k plan.
Turn ‘Solo’ 401(k) into the Perfect 401(k)
While many brokerages allow certain ‘solo’ 401k features that Vanguard does not allow, to get the most flexibility to make changes to your ‘solo’ 401k you will need to have full control over your plan document, regardless of which brokerages your ‘solo’ 401k is with. You can have any of the features that a regular 401k plan has for your own ‘solo’ 401k with a custom plan document. This document has to be drafted by a TPA (Third Party Administrator) who can customize the plan document to your specific needs. With a document in hand, all you need to do is open a ‘pooled’ account at Vanguard, called VRIP. To open this account, fill out the application and attach the relevant pages from your adoption agreement, as well as a letter of instruction that will tell Vanguard which assets (such as traditional and SEP IRAs and your existing ‘solo’ 401k plan account) should be moved into your new VRIP account. The TPA will provide you with all of the necessary paperwork.
Once the account is open, you can make contributions exactly the same way you’ve done it before. When your plan assets are over $250k, you will need to fill out and file form 5500-EZ, which you can try to do yourself, or you can have the TPA do it for you for a small fee. You will only need a single plan document for your plan (unless you plan to hire non-spouse employees later on), so the only ongoing cost will be the cost of filing the form 5500-EZ with the IRS.
After going through this process, you will, in fact, be opening your own ‘pooled’ 401k plan. If you ever hire employees, you will already have your own functioning 401k plan, so it will be relatively easy and cost effective to update the plan document to include a new plan design and to add participation requirements.
Here’s the good part. If you have a startup plan, the IRS allows you to take a $500 credit over 3 years for administrative expenses, so your plan document and subsequent administration expenses over the next 2 years will cost you next to nothing. So if you are about to open a ‘solo’ 401k, it makes sense to get a custom plan document so that you can turn your ‘solo’ 401k into the perfect 401k plan. Even if you’ve had your plan for a while, it might also make sense to upgrade your ‘solo’ 401k plan if you are contributing significant amount to your plan and want to take advantage of having a brokerage account, incoming rollovers and in-plan Roth conversions.
Summary
- Vanguard is a great place to consolidate your accounts.
- Vanguard ‘solo’ 401k does not allow ETF investing, has only Investor and not Admiral Shares, and does not allow account consolidation via rollovers. You cannot use Vanguard ‘solo’ 401k to implement the ‘backdoor’ Roth strategy or to make in-plan Roth conversions.
- With a custom plan document you can have all of the features that a regular 401k plan has (and you’ll be converting your ‘solo’ 401k into a pooled 401k), so you can have the best 401k at Vanguard with Admiral Shares, ETFs, incoming rollovers and in-plan Roth conversion available. There are two major reasons for having a customized plan document for your ‘solo’ 401k plan:
- To have full flexibility to enable plan features to allow incoming rollovers and in-plan Roth conversions. If there are any future strategies and options that become available, an off-the-shelf plan document might not have these features, so having full control over the plan document ensures that you will always be able to have the best features in your 401k plan.
- To have an actual 401k plan that can easily be upgraded by making changes to the plan document if you hire employees in the future.
- A startup plan can take advantage of a 3-year $500 credit to offset administrative cost (which includes a one-time plan document and form 5500-EZ filing if the assets are over $250k), so it might be a good idea to get a custom plan document for your plan as soon as you open it. Existing ‘solo’ 401k plan can also benefit from a custom plan document if you are contributing significant amounts to your plan and want to take advantage of having a brokerage account, incoming rollovers and in-plan Roth conversions.
[Editor's Note: I debated doing this post as a “Pro/Con” post, but was unable to come up with enough I didn't like about it to really flush out a post. However, there are a few points worth making. First, obviously Kon would love for you to hire his firm to do a customized plan document. However, it may not be clear from his post that there is a certain expense to this. While the IRS credit will help offset that expense, it will not do so completely. The credit is only up to 50% of your expenses, so it will still cost you something. So you have to determine whether the benefits are worth the additional expense and hassle. One of the benefits for me would be to get Admiral shares. But that's only worth about 0.1% per year in additional return, or $100 a year in lower expenses on a $100K individual 401(k). If the plan document costs me $775 ($388 after the credit,) then it will take me four years for the lower ongoing costs to make up for the initial cost. It's hard for me to justify the hassle for that. If your main concern is to be able to do a transfer of an old IRA in order to do Backdoor Roth IRAs, it might be easier to go to Fidelity or Etrade. Another downside of the account is that the Vanguard VRIP, at least according to the paperwork I could find, so you'll either have to do that yourself or hire a TPA to do it. I don't think you have to do that with either the regular Vanguard or the eTrade individual 401(k). At any rate, I do agree with Mr. Litovsky that this is another reasonable option for someone to use for an individual 401(k), especially if they have a large account and highly value keeping it at Vanguard with their other assets.]
[Editor's Note: Konstantin Litovsky, owner of Litovsky Asset Management, is a long-time WCI partner and an expert in designing low-cost small practice retirement plans, however, this is not a sponsored post. This article was submitted and approved according to our Guest Post Policy.]
What do you think? Would you find the benefits of a pooled individual 401(k) worth the hassle/cost? Why or why not? Where is your individual 401(k)? Are you happy with it? Comment below!
Just a clarification – the custom plan document is created by a TPA, and I make no money from this. The reason this solution is offered is because of a number of doctors, dentists and nurses who asked for the ability to customize their Vanguard solo 401(k).
This might not work for the low balance accounts if you make occasional contributions to your plan, but if you max out your solo 401k, and prefer to keep it at Vanguard, this can be something quite useful you can do. Even books like ‘Retire Secure’ by James Lange (which WCI has reviewed in an earlier post) highly recommend the solo 401k as an ideal retirement planning platform, and so it can be, provided you have the ability to do the following:
1) Incoming rollovers to put all of your IRAs/old retirement plans (also, so that you can do backdoor Roth).
2) Roth deferrals, which the current Vanguard solo 401k allows.
3) In-plan roth conversions. This can be huge for plans with a large balance as you can significantly minimize your RMDs (and taxes) by converting parts of your balance early in retirement.
Kon – What’s the fee charged by the TPA, both the initial fee for setting it up and the ongoing fee for administration? The article didn’t say. WCI gave $775 as an example for the document fee in the notes at the end. I don’t know whether it’s the actual fee or just an example. If it’s the actual fee for the setup, it’s still not clear what the ongoing fee is.
WCI – You wrote: “Another downside of the account is that the Vanguard VRIP, at least according to the paperwork I could find, so you’ll either have to do that yourself or hire a TPA to do it.” Something is missing between “I could find” and “so you’ll either.” What is it?
The same TPA who does the document will most likely be hired to do the follow up 5500 filing (with $250k or more in assets) and plan document updates. Not many TPAs will do this for a low fee, but with enough volume, some might. I don’t think my TPA has settled on a fee yet, but I’d say it will be under $1k for the plan document and probably several hundred for filing of the form 5500. She will also help with the VRIP account set up.
I usually do the VRIP forms for my clients for the pooled 401k plans, and the TPA can assist in filling out the VRIP form for the solo 401k plans. The filling out of the form is not an issue, and the TPA can also assist with the account set up, so the one-time start-up fee will also include the following services:
1) Initial consultation
2) Plan customization work
3) Plan document
4) Account set up
5) Ongoing advice
For one thing, there are many issues that come up with solo 401ks, for example:
– Can one have a solo 401k given their particular financial situation? Will they run into controlled/affiliated group rules?
– How much can they contribute into a solo 401k given various other plans they have?
If you make Roth contributions or Roth conversions inside the plan, that has to be tracked as well, so working with a good TPA who knows how all of this works (and who can assist in making sure that your form 5500 is done correctly) is key.
That’s a great question. It’s been a while since I edited this post. I’ll take a look at the link and see if I can recall what downside I was referring to. I think it is the fact that Vanguard won’t be the TPA.
Vanguard is never the TPA. The TPA Vanguard uses is Ascensus, and I do not think that they offer solo/pooled 401k plan services at all.
The TPA can do the plan document for $750 (usually costs $1500 from most firms, unless you hire them for admin services), and $250 for form 5500 filing. This is a bargain – I’ve never seen anyone offer this type of deal unless they have something else to sell (such as high expense mutual funds).
How does one seek out a TPA?
I would highly recommend that you contact Nora Bethman. This is her contact information:
Nora Bethman, CEBS, QKA, QPA, ERPA
National Employee Benefit Services, Inc.
(847) 808-0940 phone and fax
[email protected]
http://www.nebspensions.com
Maybe I am wrong but I believe you can do successful IRA investing with ETFs through Schwab at ETF fees even lower than Vanguard. I have brokerage accounts with both but use Schwab for IRA due to ETF advantage. Then you do not have to pay any financial advisor fees either.
The idea is to enable ETF investing inside your Vanguard solo 401k plan (among other things), which is currently not available. I agree that Schwab does have a good set of ETFs that I use for my clients who have brokerages at Schwab. Schwab solo 401k does allow ETF investing, but not incoming IRA rollovers, which is an important planning step for those who want to do backdoor Roth contributions, so even with a Schwab solo 401k a custom plan document might be a good idea.
Yes, Schwab has some very low fee ETFs. My 401(k) is at Schwab and I purchase both Schwab and Vanguard ETFs through it. They are very competitive.
I use TD Ameritrade for both my 401k and ROTH 401k plans. They offer lots of options for low cost commission-free ETFs. Many investors don’t realize that assets in a ROTH 401k are included when calculating RMDs. I plan on gradually converting funds from both 401ks as well as my TIRA into my ROTH IRA before I turn 71. Form 5500 is one of the easiest tax forms to use; it took me less than 10 minutes to complete.
Excellent point on the Roth 401(k) RMDs. Little reason to leave Roth money in a 401(k) after leaving an employer (perhaps a bit more asset protection.) I also agree 5500 isn’t particularly intimidating as tax forms go, especially the EZ version most docs in this situation would be using.
http://www.irs.gov/pub/irs-pdf/f5500ez.pdf
Good point – Ameritrade is a great brokerage with access to the best available commission-free ETFs. Not everyone is comfortable investing in ETFs though, but if you prefer ETF investing, you can’t go wrong with Ameritrade. Also, I would not use ETFs for big portfolios – ETFs are great when portfolios are small so that you get instant low cost diversification – once your portfolio grows beyond a certain point, low cost Admiral shares can be used instead to avoid the hassle of buying ETFs (and having to rebalance, especially if your portfolio contains multiple asset classes).
With a custom plan document you do not need two different accounts, and you can convert your 401k assets into Roth assets right inside your plan with a stroke of a pen and hardly any paperwork (moving them to a Roth will require a distribution request). The big advantage of a VRIP or a pooled plan is that you have full control over the assets and you don’t need to have to fill out the forms or have to wait for the brokerage/custodian convert the money. As long as what you are doing is legal and is properly documented by you or your TPA (and filed correctly on the form 5500) you don’t need to fill out multiple documents to convert to Roth.
Right now to convert assets from a traditional solo 401k to Roth you’d have to fill out distribution forms for every transaction, and then you have to make sure that that money is placed into your traditional IRA, and then converted to Roth, or do a direct rollover to Roth. I haven’t dealt with Ameritrade paperwork but I can tell you that Vanguard often makes mistakes and the paperwork can be problematic so I try to minimize such transactions.
Other than that, those who are very comfortable with DIY will be just fine using Ameritrade brokerage.
Kon, thanks for the information. Good points to keep in mind as conversion time approaches.
Forgot to add that I recently read somewhere that when doing conversions from both a regular 401k and a ROTH 401k, one should transfer the regular 401k only into a TIRA, and transfer the ROTH 401k only into a ROTH IRA to reduce complex paperwork. Do you agree?
Nora Bethman offers this comment in response: “That used to be the thinking – that you should transfer like kind to like kind. However, with the recent law changes that allowed for back door Roths and in-plan Roth conversions, it may be less important to do so now. However, no matter what is transferred, it is critically
important to keep very, very good records of cost basis, earnings, dates, and other transactions for tax purposes, now and in the future.”
I’d like to add that as far as paperwork I find that Vanguard is now making lots of mistakes in processing even the simplest transactions, so it is difficult to say which way will be easiest, but what you describe sounds reasonable, and I’d try doing that first.
One other point. If you have a spouse employee and you want to do a Roth 401k, you’ll end up having 4 different accounts, which will be a pain to manage all together. So one reason for having a pooled account is to simplify investment management. You can also meet the thresholds for Admiral Shares much quicker this way.
Here’s a typical scenario. You have a W2 job and a little bit of 1099 income. You want to do backdoor Roth but have some old 401k/IRAs/SEPs, etc. The idea is to open a solo 401k plan and to roll the IRAs into your solo 401k. Then if you have a year when your income is lower (or when you are ready to convert to Roth) you can do in-plan Roth conversions without having to take the money out. With in-plan Roth conversion feature you can enable on-demand in-plan Roth conversions specifically when your situation warrants it without having to do complex transactions (such as moving assets into a Roth IRA).
To clarify/summarize, in a step-by-step process, the tasks I need to do in order to set up this custom solo 401K at Vanguard and then transfer my existing funds at a previous solo 401K into it are:
1. Get a TPA to draft a custom plan document, which includes:
a. Allows incoming rollovers
b. Backdoor Roth contribution
c. Ability to purchase Admiral shares
d. Brokerage option to have the ability to purchase ETFs
e. in-plan Roth conversion of tax-deferred contributions and rollover assets regardless
2. Open a ‘pooled’ account at Vanguard (VRIP)
a. Fill out the application (http://www.vanguard.com/pdf/s760.pdf)
b. Attach the relevant pages from your adoption agreement,
c. Letter of instruction that will tell Vanguard which assets (such as my existing ‘solo’ 401k
plan account) should be moved into your new VRIP account.
Please let me know if there are steps I’m missing. Thanks!
You want to do both Roth salary deferrals and in-plan Roth conversions (which can be considered as ‘backdoor’, I guess).
With a VRIP account you will have the ability to purchase Admiral shares (and ETFs if you so decide).
Unfortunately, it is not enough to do the letter of instruction. There are several forms that Vanguard requires to move your existing Vanguard assets.
For IRAs you want an IRA Distribution Kit, which Vanguard is updating based on my interaction with them (it was not adequate for VRIP accounts, as it had Option D as the only available choice, which created confusion for Vanguard when VRIP was listed as the ’employer-sponsored plan’).
For solo 401k plan you want to fill out Individual 401(k) Asset Transfer Form.
And do attach letter of instruction indicating which accounts will be moved where. By itself it won’t be enough, but with the above transfer forms everything should work.
Excellent post and info! A quick personal scenario and question: I use Vanguard Personal Advisory Services to manage my investment accounts including Roth and traditional IRA and a non tax-advantaged account. I’m a 40 year old physician with two jobs, one W2 employed (260K) and one with 1099 income of approximately 100K per year. I currently max out an employer sponsored 401K (57K at Fidelity), along with backdoor Roth conversions. The rest of my surplus goes into a regular taxable investment account (Vanguard). I would like to take advantage of a solo 401K at Vanguard using my 1099 income from my second job. Also, in the future I might leave my W2 employed job and change to only 1099 work.
First of all, is a custom solo 401K plan right for me? And, if so, will the Vanguard advisory services be able to manage this custom solo 401K along with my other accounts? I’m new to investing and since my total investment balance is still relatively low (190K), the 0.3% advisory fee is worth it to me. Thanks!
This is a good question. You might want to ask Vanguard if they will manage it. I imagine they won’t touch solo 401k plans and VRIP accounts because of extra complexity, as these are ‘small business’ plans for which you have to get quality advice including how much you can contribute based on your specific situation. Vanguard’s advice is rudimentary at best, and not tailored to doctors/dentists/small business owners, and I don’t believe they provide small business tax planning advice.
A solo 401k plan will make sense if you make enough in 1099 income, as you can contribute the 20% of your 1099 income. The solo 401k platform at Vanguard is exactly what you will need going forward if you want a retirement plan for yourself. If you make enough, you might even consider doing a solo DB plan (with another pooled account that can be opened at Vanguard).
If you want to consolidate your retirement plans in the future, you will want a custom document for the Vanguard solo 401k for sure. Also, you can take advantage of an in-plan Roth conversion if your tax situation warrants it. For example, if you can defer a significant amount (say $100k in a 401k + DB plan), you might want to do a Roth conversion for some of the assets right inside your plan.
Vanguard basically provides very rudimentary/cookie-cutter asset allocation services for 0.3%. This is fine, but not nearly enough. Customized planning is far more important than asset allocation. For example, they won’t provide any tax planning advice, help you select the best plan(s) for your practice, tell you when/how much to convert to Roth, etc. They will probably not tell you the best HSA or a 529 plan to open, they won’t manage your non-Vanguard accounts, which can be very important because if you have an expensive 401k plan with a brokerage option, it is key to use the brokerage rather than the mutual funds inside the plan. It goes without saying that they won’t help you with estate planning and insurance, loan/mortgage repayment optimization, cash management, etc. Lastly, they are NOT acting in a fiduciary capacity. As employees of Vanguard, they work for Vanguard, and they won’t recommend that you buy non-Vanguard ETFs in your Roth IRA for example, even when there are some asset classes clearly missing in Vanguard’s lineup. Chances are they also won’t give you a better asset allocation in an IRA (which can be achieved using ETFs rather than mutual funds, which have high minimum amounts vs. ETFs, so for $20k you can have a fully diversified/balanced 13-asset class portfolio of ETFs, while only two admiral shares funds). I use Vanguard primarily, yet I’d say that if your situation is more complex than average (and you have a spouse who can potentially be an employee for your practice and/or has their own non-Vanguard accounts or plans), their advice will not be adequate. In short, for a lower fee, you get a lot less advice than what you might need (based on what I see doctors with your situation might need), so that’s one tradeoff to consider.
I don’t see why they couldn’t.
I have just spoken with a representative at Vanguard’s retirement investment program. She confirmed that the advisory services would not actively manage the solo 401K but would provide allocation guidance. She also mentioned that in my particular current situation(employed W2 with employer 401K match, along with 1099 income on the side) a SEP IRA might be a better choice, as a SEP IRA would still allow a full complement of investment classes, including brokerage assets and ETFs, and would also not require any IRS reporting or need for a TPA or form 5500. And the Vanguard personal advisory services does manage SEP IRAs.
Question: What are the benefits of SEP IRA vs custom pooled solo 401K? As a private contractor earning a 1099, wouldn’t the solo 401K be a better option? And how much does the added cost and paperwork hassle of the custom 401K vs regular solo 401K or SEP IRA factor into the equation? Thank you!
Did you ask them whether they will provide advice to a VRIP account? That’s a completely different beast from a solo 401k. That one they might not even provide guidance on. Of course they will offer a SEP – they can get an AUM fee out of it, whereas I’m not sure they will charge you an AUM fee for a solo 401k and/or VRIP.
You can not do a backdoor Roth contribution with the SEP, so if you want to continue doing that, you will have to stop if you use a SEP. As I mentioned before, your solo 401k might have better investments than your current 401k plan, so you might want to think about how much salary deferral you contribute to your 401k at work vs. a solo 401k so that would be a tradeoff as well. And if you want to work for yourself in the future, it goes without saying that you want a solo 401k not a SEP. You do not need a custom document right away, at least not until you want to roll assets into it and/or make Roth conversions inside it, and you can do Roth salary deferrals at first if you would prefer(something SEP does not offer).
Lots of factors to consider – Vanguard is looking at it their own way, which is not necessarily in your best interest.
The Vanguard rep stated that the advisory services would provide allocation advice to both solo and VRIP 401Ks, just not active management. It looks like the VRIP is probably my best option, with the downside of cost and paperwork that I’ll have to get comfortable with.
Ok, that makes sense. As far as paperwork, you are basically opening your own 401k plan, so yes, that’s something to consider. If you ever want to hire your own employees though, you’ll already have a 401k plan going, so that’s another consideration.
I just opened up a solo401K at TD Ameritrade. They had told me I could transfer money from my business account and roll over an old 401K into this solo 401K.
After I opened it, it looks like I cannot do ACH from my business checking (that’s what it says on the “Deposit/Transfer” Page. Also, the “Depost/Transfer” Page says I cannot roll over any other retirement plan into my solo 401K!
To put any money into the solo401K, it looks like I will have to wire the money or send a check from the business account. THey also said I could transfer the money from my taxable account but that does not seem Kosher as this money is from my 1099 income which goes into my business bank account at Citibank.
I will call TD Ameritrade to clarify, but if this is indeed the case, may I open a solo 401K at Vanguard and transfer the TD Ameritrade solo 401K into it, as well as an old 401K from my W2 job? Does the Vanguard solo 401K allow ACH from Business checking?
If not, which place offers these things?
Thanks!
I believe with Vanguard VRIP you can use ACH via small business portal. No need for wires/checks. With a solo 401k I believe you can use the same business portal, however Vanguard does not allow in coming rollovers (unless that has changed). With a VRIP you can also roll over anything. It is a VRIP, so nobody tells you what you can and can’t do. However, you need a TPA to draft a custom plan document as well as to administer this account because nobody will do it for you. WCI has a post somewhere on solo 401k plans and the options available from different custodians. A VRIP account is basically a full blown 401k plan where you can do after-tax contributions as well (if that’s what your plan document allows for). You can NOT just transfer money into the plan that is not 1099 or eligible income. Maybe you misunderstood about after-tax contributions (which still have to be made with eligible income).
They take 401(k) rollovers, just not IRA (including SEP-IRA) rollovers as far as I know.
Thanks WCI….are you saying the Vanguard solo 401K takes 401K rollovers, or only the VRIP takes solo 401K rollovers.
I would have called Vanguard to ask, but if they are anything like TD Ameritrade, most of the people you talk to don’t know anything!!
My understanding is they do take 401k rollovers in their standard cookie-cutter plan, but I could be wrong. Best to check with Vanguard.
Thanks for your reply!
How much do you charge to set up VRIP?
Can you explain how you make after tax contributions to the VRIP and how you convert that to Roth? Can you do it immediately just like the back-door Roth so as not to have to pay any taxes on gains?
Thanks!
I don’t work with VRIP accounts or solo 401k plans (I only work with ERISA plans). This article was written to provide information on VRIP to WCI readers for those who want to keep their assets at Vanguard. You will need to hire a Third Party Administrator to create a plan document, and it is not difficult to open a VRIP account on your own. The TPA will help you with all of the features of your account such as after-tax contributions and in-plan Roth conversions, those are not hard to do and they simply have to walk you though the technical aspect (how exactly is this done). Usually in-plan conversions are as easy as designating specific assets as Roth (and you can specify those to be the after-tax assets). This is why a TPA is a must there – too many moving parts and they have to track every $ to make sure you are doing it right (as well as to file form 5500 once you reach $250k in assets). One thing to note is that after-tax is not necessary at all if your net income is high – you can convert tax-deferred assets to Roth inside the plan (and pay the taxes) if your net is high enough to put the full $57k contribution. I’m also not sure whether the TPA route is the best one for everyone. In some cases it is the best way to do it, in other cases (especially when you can max out a solo 401k) you don’t really need anything special. For those in the highest brackets Roth conversions are not a priority vs. tax-deferral.
Yes and yes.
Just an FYI. I have a Vanguard i401k, and they upgraded to Admiral Funds within the last year or so. I am able to invest in VTSAX at 4 basis points and $0 in account fees.
Yes, this has been true for a while now. VRIP accounts are still useful for DIY custom solo 401k plans, though other service providers such as Fidelity and TD Ameritrade are just as good.
Yes, I’m aware. It’s a nice improvement.
Great information! I am very grateful for WCI’s and Mr. Litovsky’s insights.
I believe I am now ready to transition to more (if not all) ROTH contributions starting 2021 or 2022. We have some in ROTHs now, and I take great pleasure in knowing that I don’t have to pay taxes on that entire amount. Ever. Again. (As long as the laws don’t change…)
I am an owner-single employee S Corp. Current Vanguard SEP ~$500K. I made 2020 SEP contributions in 1Q 2021 but have not made any 2021 SEP contributions yet. I would like to stay with Vanguard. Would a Vanguard Solo 401K with ROTH option opened with a custom plan document (aka VRIP) work for me? Should I just finish this year out with the SEP and open a VRIP in Jan 2022 or do this now?
Would my proper steps be to:
1) Have a TPA draw up a custom plan document that would allow my SEP rollover, ROTH contributions, in-plan ROTH conversions, Admiral shares.
*Do you still recommend the TPA mentioned in the above comments from 2015? Would I need those TPA services every year or just for the first year? Sounds like Form 5500EZ is straightforward and can be handled by my accountant.
2) Open VRIP with Vanguard and rollover the SEP. (Greg’s post 6/9/15 was helpful.). Then start 2021 ROTH contributions to VRIP. And Backdoor ROTH by end of year.
*Could the ROTH contributions be designated from employER or must they be employEE only?
* Would it be advantageous to leave some portion of the solo 401K as ROTH to make the tax bill more bearable from the RMDs in latter years? Or just go ahead and rollover the Roth 401k to personal ROTHs before 72 yo?
OR should I just forget about this complex plan and just open a Vanguard Solo 401K with ROTH option (contributing only to the ROTH portion and forgetting the Backdoor for me)?
I am a bit overwhelmed and would love some advice! This website has been a financial life-changer.
Thanks!
If you haven’t made the 2021 contribution, you can just as well set up a 401k for 2021 as make a SEP contribution. You definitely need the TPA to be there for you each year. I’ve seen https://www.mysolo401k.net/ mentioned before, I think this would be fine for what you are trying to do. They need to maintain the plan document, but if your accountant can do the form, that would be fine as well (I would have mysolo401k do the forms though, if they offer this service, they are the experts).
If you only want to contribute up to $19.5k in Roth, then Vanguard’s regular solo 401k is fine. The VRIP version is necessary only if you are planning to do large after-tax contributions (or in-plan Roth conversions). It is definitely more complex than Vanguard’s product. You can always convert to Roth later (by rolling everything to to a traditional IRA and doing conversions from there). The only other time you might want a custom solo 401k is if/when you set up a Cash Balance plan (in that case you can make after-tax contributions into the solo 401k since your profit sharing would be limited to 6% with a CB plan).