advice - sep ira to solo 401k

[dmlr06]

Hi,

I am an independent contractor physician with an LLC and a SEP IRA currently managed by an advisor.  I plan to switch to an individual/solo 401k at Vanguard that I manage, but Vanguard doesn't allow SEP IRA to solo 401k rollovers.  I called Vanguard and they recommended the following:

Transfer SEP-IRA to a SEP-IRA at vanguard and just let it sit - no more contributions.  Open a new solo 401k for new contributions.  

Does that sound right?  The guy on the phone didn't know of any downsides.

Alternatively, I have heard of some people transferring their SEP IRA to Fidelity (which allows such rollovers) and then transferring it to Vanguard.

I'm not sure how that would work.  I'm assuming that the funds stay as cash at Fidelity until it can be transferred to Vanguard to avoid any short-term volatility and avoid any fees (some funds have fees if you hold them for less than a year, right?).  Does that sound preferable?

Any advice is appreciated!

I have my asset allocation pretty much chosen after doing a decent bit of reading in the last few months, but am not sure on these technical details.

Thanks,

dmlr

[conniebird]

You want a solo 401k so that you can still do a backdoor Roth IRA.
You can't do it at vanguard for the reasons you stated above. Why not just open it and keep it at fidelity?

[dmlr06]

I will do a portion of my future contributions as Roth 401k.  The guy at Vanguard said I could have the SEP IRA sit there and still do future Roth contributions as part of my solo 401k contributions.

I guess, I had just decided on vanguard for all of the positives I hear; that's what I've researched the most and where I'll be putting other accounts.  So, I'd rather keep it all under the same roof even if it's extra hassle in the beginning.

 

 

 

[jfoxcpacfp]

dmlr06 wrote:

Hi,

I am an independent contractor physician with an LLC and a SEP IRA currently managed by an advisor.  I plan to switch to an individual/solo 401k at Vanguard that I manage, but Vanguard doesn’t allow SEP IRA to solo 401k rollovers.  I called Vanguard and they recommended the following:

Transfer SEP-IRA to a SEP-IRA at vanguard and just let it sit – no more contributions.  Open a new solo 401k for new contributions.  

Does that sound right?  The guy on the phone didn’t know of any downsides.

Alternatively, I have heard of some people transferring their SEP IRA to Fidelity (which allows such rollovers) and then transferring it to Vanguard.

I’m not sure how that would work.  I’m assuming that the funds stay as cash at Fidelity until it can be transferred to Vanguard to avoid any short-term volatility and avoid any fees (some funds have fees if you hold them for less than a year, right?).  Does that sound preferable?

Any advice is appreciated!

I have my asset allocation pretty much chosen after doing a decent bit of reading in the last few months, but am not sure on these technical details.

Thanks,

dmlr

Click to expand...

The downside is that you will not be able to do tax-free backdoor Roth IRA contributions. I agree with conniebird - why not just leave it at Fidelity?

[Dicast]

If your only goal is to be self directed a SEP IRA is the easiest option.  If you want to and are able to max the 53k for a solo 401k then having a solo 401k to roll your current SEP IRA into would allow backdoor roth contributions.

I just completed the process of rolling my SEP IRA at Vanguard to a Fidelity solo 401k so that I could open up backdoor roth space.  I didn't see the benefit of rolling back to Vanguard as the expense ratios are better at Fidelity for a solo 401k plan and equivalent mutual funds.

If you really want to have everything at Vanguard and you also want to do a backdoor Roth then I would suggest following Kon's post on setting up a custom plan at Vanguard.

[dmlr06]

The solo 401k allows me to keep my income lower for the same retirement contribution.  I have an LLC; so, I keep my W-2 income lower and take the rest of the income as a distribution.  I've had to increase my W-2 income just to do my retirement contributions.  The solo 401k will allow me to have a lower income with higher retirement contributions.

In my reading, research, planning, I had simply been directed towards vanguard funds and that's what I have chosen.  Hence, my preference for Vanguard.

The solo 401k allows Roth contributions which I thought negated my need for a backdoor roth; is that correct?

[Dicast]

dmlr06 wrote:

 

...The solo 401k allows Roth contributions which I thought negated my need for a backdoor roth; is that correct?

Click to expand...

My general understanding is that pretax contributions for most physicians will be more beneficial than after tax Roth contributions, unless you think you'll be in a higher tax bracket when you retire.  For me the purpose of a backdoor roth is to stuff just a little more money into protected retirement accounts and since I can't make pretax contributions to an IRA a Roth conversion just makes sense so that I don't pay them on the back end.  In my pre-tax 401k contributions we are essentially deferring at a 39.5% tax rate with the expectation that we won't be having nearly the income/tax rate at retirement.  If for some good fortune we save enough to push us up into the top bracket in retirement I guess we'll just have to "deal" with it...but that would be something like 11 million at a 4% withdrawal rate with the current tax brackets.

If you do decide to go with Roth 401k contributions, I am pretty sure that Fidelity does not allow Roth contributions in solo 401ks.

[litovskyassetmanagement]

dmlr06 wrote:

The solo 401k allows me to keep my income lower for the same retirement contribution.  I have an LLC; so, I keep my W-2 income lower and take the rest of the income as a distribution.  I’ve had to increase my W-2 income just to do my retirement contributions.  The solo 401k will allow me to have a lower income with higher retirement contributions.

In my reading, research, planning, I had simply been directed towards vanguard funds and that’s what I have chosen.  Hence, my preference for Vanguard.

The solo 401k allows Roth contributions which I thought negated my need for a backdoor roth; is that correct?

Click to expand...

Or you can open a VRIP account at Vanguard (basically a pooled trust account) and hire a TPA to create a custom plan document to allow incoming rollovers and in-plan Roth conversions.  The downside is that you have to pay the TPA for a plan document (one time) and for annual maintenance as well.  This is what we do all the time when assets need to be consolidated at Vanguard.  It might not be worth doing for low 401k balances/contributions, but if your solo 401k is your only plan and you are maxing it out, doing so would be a good idea (you can use Admiral share funds and you can buy ETFs inside the VRIP account, while in a solo 401k at Vanguard you can only use investor shares).

[jfoxcpacfp]

dmlr06 wrote:

The solo 401k allows Roth contributions which I thought negated my need for a backdoor roth; is that correct?

Click to expand...

That is not correct. You can max out backdoor Roth contributions in addition to any Roth space in a 401k. A 401k is a business retirement account and a Roth IRA is a personal retirement account. There is no reason not to do so after you have contributed the maximum to pre-tax retirement space, unless you simply prefer a taxable account.

[dmlr06]

I see your point, Johanna; we should be able to meet our retirement goals without needing to go above the solo 401k max.  But that could change in the future; so, it may be a better idea to keep that option available.