SEP IRA to Individual 401k

[Seekerofthetree]

So I have an interesting question.  I am going through this learning process this year.  I am with Vanguard and setup a SEP IRA for this year.  I contributed 30+k into.  I realize that ultimately 401k is better after reading multiple posts.  My question is what are the tax implications of taking my SEP IRA and taking the money out and zeroing the account and contributing that money to my 401k?  Is this going to be an issue?  Can I do this?

[jfoxcpacfp]

Seekerofthetree wrote:

So I have an interesting question.  I am going through this learning process this year.  I am with Vanguard and setup a SEP IRA for this year.  I contributed 30+k into.  I realize that ultimately 401k is better after reading multiple posts.  My question is what are the tax implications of taking my SEP IRA and taking the money out and zeroing the account and contributing that money to my 401k?  Is this going to be an issue?  Can I do this?

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There are no tax implications for a direct rollover from your SEP to a SOLO-401k. With a direct rollover, the custodian moves the money or investments directly from one account to the other. You do not touch it.

On the other hand, if you follow the procedure you described above, Vanguard must withhold 20% of your account balance for estimated taxes (in case you keep the money and don't move to the SOLO-k). When they do that, you will have to come up with the $6k taxes withheld to put into the SOLO-k and it all must go into the SOLO-k within 60 days. You would then get a refund of your withheld $6k taxes when you file your income tax return in the following year. Doing a direct rollover avoids this problem.

[Seekerofthetree]

Thank you so much for the quick reply!

[Seekerofthetree]

They won't do a direct rollover or withhold the 20% so now I have to cash it out and start a 401k.  They are telling me I will have to pay 10% in penalties for early withdrawal etc...I am just converting the account for the same tax year.  Is that a big deal?

[conniebird]

Call and confirm, but my friend had a SEP IRA at Vanguard and she was able to convert it to solo 401k - she did not open a solo 401k from scratch (since they don't take roll overs).Let us know if that works.

[jfoxcpacfp]

Seekerofthetree wrote:

They won’t do a direct rollover or withhold the 20% so now I have to cash it out and start a 401k.  They are telling me I will have to pay 10% in penalties for early withdrawal etc…I am just converting the account for the same tax year.  Is that a big deal?

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I don't use Vanguard but I understand this is a problem with them. It is very irritating. If you want to stay with Vanguard, just get a check and open your new account within 60 days and there will be no penalty. MAKE SURE they are not withholding any taxes. Otherwise, I would suggest transferring to a different custodian.

Maybe some of the Vanguard users on this forum have better suggestions.

[conniebird]

Or open solo 401k at fidelity - they DO take rollovers.