i401k to Roth

[ENT Doc]

My wife owns a business, set up originally as a LLC.  She is the only employee, has 2 independent contractors.  She is closing her business this year and has an i401k that we would ideally like to convert to a Roth in 2018.  She has only ever filed a Schedule C and SE.  Questions:

1. Is she required to file any forms other than a schedule C/SE in order to indicate to the IRS that this business is closed?  The IRS website for closing businesses lumped all business types together and included some seemingly irrelevant forms.

2. Is there a triggering event or document required before she can officially convert the i401k to a Roth?

Thanks!

[spiritrider]

1. Regardless if you have ever been required to file a Form 5500-EZ, because your year-end balance was >= $250K. To terminate the 401k, you must file a final Form 5500-EZ by the last day of the seventh (7th) month following the withdrawal/rollover of all 401k assets. There are serious penalties for failure to file/late filing.

2. All that is required is to tell the custodian that you are terminating the 401k and would like to rollover the assets to the Roth IRA. This is actually the first step in terminating the 401k.

[MPMD]

wait, you can roll a solo 401k into a Roth IRA?

[jfoxcpacfp]

MPMD wrote:

wait, you can roll a solo 401k into a Roth IRA?

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Yes, you have 3 options (@spiritrider, do you have more to contribute?):

1. R/o after the account is closed,


2. Choose the NRAT option for your active solo-k and make periodic conversions,


3. Open a solo-k with a Roth option, which requires no r/o to a Roth.

[MPMD]

jfoxcpacfp wrote:

MPMD wrote:

wait, you can roll a solo 401k into a Roth IRA?

Click to expand…

Yes, you have 3 options (@spiritrider, do you have more to contribute?):

1. R/o after the account is closed, and


2. Choose the NRAT option for your active solo-k and make periodic conversions.


3. Open a solo-k with a Roth option, which requires no r/o to a Roth.

Click to expand...

Already opened w/ Fid which doesn't allow NRAT or Roth 401k.

But can I just "churn" it? Like wait until I have $25k in there or whatever and then close, roll into Roth IRA, and open a new one?

[ENT Doc]

A related question to MPMDs question. Can you keep the business going, terminate the plan, and then roll over to a Roth? Or do you have to officially leave/close the business?

[jfoxcpacfp]

MPMD wrote:

But can I just “churn” it? Like wait until I have $25k in there or whatever and then close, roll into Roth IRA, and open a new one?

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Actually, you can if your plan document allows (the prototype you have at Fidelity probably doesn't). If that's the case, you can amend the plan document to a customized plan document that allows "in-service rollovers". You'll have to pay a fee for doing so, of course.

ENT Doc wrote:

Can you keep the business going, terminate the plan, and then roll over to a Roth? Or do you have to officially leave/close the business?

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Yes, if you follow the provisions of your plan document. But why you would want to shut down your plan? Better to just use a custodian that allows for Roth 401k contributions in the prototype plan document (I know TDA does and I'm sure they're not the only one) or have a customized plan document drafted that allows for in-service rollovers, assuming your current document does not allow.

[ENT Doc]

Seems more efficient to just amend the plan to allow in-service roll-overs. Wonder if Fidelity will allow for this. Will ask. Ideally my wife would like to keep a segment of the business going but the benefits to Roth conversion under the new tax plan are too good to pass up for us right now.

[jfoxcpacfp]

ENT Doc wrote:

Seems more efficient to just amend the plan to allow in-service roll-overs. Wonder if Fidelity will allow for this. Will ask. Ideally my wife would like to keep a segment of the business going but the benefits to Roth conversion under the new tax plan are too good to pass up for us right now.

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Just keep in mind that the ability to recharacterize is going away. While that doesn't bother me, it is a benefit for some.

[spiritrider]

1. Yes, you can terminate a one-participant 401k plan and still keep the business operational. However, the IRS intends for 401k plans to be permanent. There is a "successor plan rule" that requires waiting one year before adopting a new 401k and the IRS would take a dim view of repeated terminations and adoptions.

2. IRS regulations prohibit the withdrawal/rollover of employee deferrals prior to age 59 1/2. Withdrawals/rollovers of vested employer contributions and after-tax contributions prior to age 59 1/2 may be allowed at the discretion of the 401k plan. Fidelity does not allow any in-service withdrawals/rollovers prior to age 59 1/2 in their Self-Employed 401k.

The Ascensus plan document used by ETrade, Schwab, TD Ameritrade. and Vanguard allows in-service withdrawals/rollovers of employer contributions two years after contributions and immediately five years after adoption. I do not know whether their custodial policies support this.

I am not aware of any mainstream one-participant 401k provider that allows employee after-tax contributions.

3. When a sponsor adopts a 401k plan, they are first and foremost adopting their 401k plan by designation, typically a number, that has no relationship to the financial institution. Then the plan documents, custodian, trustee, administrator and fiduciary may be associated by the adoption agreement and other agreements. You can amend any of these without changing the fact that you still have the designated plan.

One-participant 401k adoption agreements at the mainstream providers associate a plan document with their custodianship and maybe trustee services (Fidelity and Vanguard yes, many others no). They limit your ability to amend to just the adoption agreement and to accept IRS required amendments to the plan document. They do not allow you to amend any plan document provisions or custodial policies.

Since the 401k plan is that of the sponsor, the sponsor can amend the plan to change providers. So while you can not amend custodial policies to add employee after-tax contributions and/or in-service withdrawals/rollovers, you can amend your plan to move to a new mainstream provider or new document, custodian, trustee and/or Third Party Administrator (TPA).

I hope I am clarifying the issues and not confusing anyone.

[ENT Doc]

spiritrider wrote:

1. Yes, you can terminate a one-participant 401k plan and still keep the business operational. However, the IRS intends for 401k plans to be permanent. There is a “successor plan rule” that requires waiting one year before adopting a new 401k and the IRS would take a dim view of repeated terminations and adoptions.

2. IRS regulations prohibit the withdrawal/rollover of employee deferrals prior to age 59 1/2. Withdrawals/rollovers of vested employer contributions and after-tax contributions prior to age 59 1/2 may be allowed at the discretion of the 401k plan. Fidelity does not allow any in-service withdrawals/rollovers prior to age 59 1/2 in their Self-Employed 401k.

The Ascensus plan document used by ETrade, Schwab, TD Ameritrade. and Vanguard allows in-service withdrawals/rollovers of employer contributions two years after contributions and immediately five years after adoption. I do not know whether their custodial policies support this.

I am not aware of any mainstream one-participant 401k provider that allows employee after-tax contributions.

3. When a sponsor adopts a 401k plan, they are first and foremost adopting their 401k plan by designation, typically a number, that has no relationship to the financial institution. Then the plan documents, custodian, trustee, administrator and fiduciary may be associated by the adoption agreement and other agreements. You can amend any of these without changing the fact that you still have the designated plan.

One-participant 401k adoption agreements at the mainstream providers associate a plan document with their custodianship and maybe trustee services (Fidelity and Vanguard yes, many others no). They limit your ability to amend to just the adoption agreement and to accept IRS required amendments to the plan document. They do not allow you to amend any plan document provisions or custodial policies.

Since the 401k plan is that of the sponsor, the sponsor can amend the plan to change providers. So while you can not amend custodial policies to add employee after-tax contributions and/or in-service withdrawals/rollovers, you can amend your plan to move to a new mainstream provider or new document, custodian, trustee and/or Third Party Administrator (TPA).

I hope I am clarifying the issues and not confusing anyone.

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I thought you could do a withdrawal/rollover if you left the business prior to 59.5.  Getting back to my wife's original goal, would she not be able to roll the 401k money into a Roth if she either terminated the 401k or ended the business?  She's not ending the business for this reason, but it seems to fit the classic definition that I've seen described whereby someone could get at 401k money early.

[spiritrider]

ENT Doc wrote:

I thought you could do a withdrawal/rollover if you left the business prior to 59.5.  Getting back to my wife’s original goal, would she not be able to roll the 401k money into a Roth if she either terminated the 401k or ended the business?  She’s not ending the business for this reason, but it seems to fit the classic definition that I’ve seen described whereby someone could get at 401k money early.

Click to expand...

You can do a withdrawal/rollover if you separate from an employer or the employer terminates the plan. The restrictions I was referring to were for in-service withdrawals/rollovers which refer to such actions while still employed.

Closing the business requires terminating the 401k, but terminating the 401k does not require closing the business. However, as I stated. You are not allowed adopt a new 401k for one year after terminating a 401k.

Personally, I think it is not a good idea to terminate a one-participant 401k plan just to be able to convert assets to a Roth. If you want to make future Roth 401k deferrals, amend the Fidelity plan to another one-participant 401k provider that accepts rollovers (not Vanguard) and offers Roth designated 401k accounts (not Schwab).

I think people are lulled into a false sense of security that one-participant 401k plans are just bigger IRAs. They are not, they are 99.5% full blown 401k plans. One pf my favorite statements; "Just because you can do something does not mean you should do something."

[ENT Doc]

spiritrider wrote:

ENT Doc wrote:

I thought you could do a withdrawal/rollover if you left the business prior to 59.5.  Getting back to my wife’s original goal, would she not be able to roll the 401k money into a Roth if she either terminated the 401k or ended the business?  She’s not ending the business for this reason, but it seems to fit the classic definition that I’ve seen described whereby someone could get at 401k money early.

Click to expand…

You can do a withdrawal/rollover if you separate from an employer or the employer terminates the plan. The restrictions I was referring to were for in-service withdrawals/rollovers which refer to such actions while still employed.

Closing the business requires terminating the 401k, but terminating the 401k does not require closing the business. However, as I stated. You are not allowed adopt a new 401k for one year after terminating a 401k.

Personally, I think it is not a good idea to terminate a one-participant 401k plan just to be able to convert assets to a Roth. If you want to make future Roth 401k deferrals, amend the Fidelity plan to another one-participant 401k provider that accepts rollovers (not Vanguard) and offers Roth designated 401k accounts (not Schwab).

I think people are lulled into a false sense of security that one-participant 401k plans are just bigger IRAs. They are not, they are 99.5% full blown 401k plans. One pf my favorite statements; “Just because you can do something does not mean you should do something.”

Click to expand...

Thank you.  My wife's situation is fairly specific, and I don't anticipate her continuing in the line of work her current business is in, or starting a new i401k any time soon (if ever).  I think the optimal decision is to roll the assets into a Roth, provided a certain tax law comes into effect.  Now regarding Pub 560, it categorizes a rollover as a distribution.  She would qualify for a distribution because the plan ended.  However, regarding the 10% penalty it doesn't appear that she would qualify under any of the exemptions.  Does this penalty section of Pub 560 specifically refer to those distributions paid out and not rolled over?  How is one supposed to know this, and where can I get more guidance?  Thanks!

[spiritrider]

Rollovers are not subject to the early withdrawal penalty.

I'm pretty sure that is reflected in Pub 560. If not there should be plenty of other references.