Rollover IRA to Solo 401k
It looks like the Roth IRA conversion rule changes will stick, at least for 2010. There are only three months until the end of 2009. Congress is busy with something else. I don't think they will repeal the current law before the end of the year.
In preparation for converting my non-deductible IRA contributions to Roth IRA in 2010, I'm rolling over the pre-tax portion of my traditional IRA to my solo 401k. I set up the solo 401k last year primarily for this purpose — to provide a harbor for my pre-tax IRA money so I won't get taxed proportionally on my Roth conversion. After the rollover, I should have only one small IRA, consisting of my non-deductible contributions plus or minus market fluctuations from now until I convert in January 2010.
I have my solo 401k with Fidelity. When I called them about the rollover procedures, to my surprise, the rep actually discouraged me from doing so. To his credit, he made valid points. He knew what he was talking about. Fidelity trained them well.
He said the 401k has more restrictive rules on withdrawals. Before I reach 59-1/2, I can withdraw from a traditional IRA for any reason. I just have to pay tax and the 10% early withdrawal penalty. Not that people should do that but that option is there. If I put the money into the solo 401k, I have to qualify for specific hardship events before I'm allowed to withdraw and pay the tax and the 10% penalty. Fidelity's solo 401k plan does not allow loans.
He also said rolling over money in an IRA to a solo 401k will get the solo 401k closer to an IRS reporting threshold. When a solo 401k plan's assets reach $250,000, the plan administrator will have to file a Form 5500-EZ with the IRS every year. I can avoid the extra paperwork for more years if I don't rollover IRA money into my solo 401k.
I would agree with him if I'm not preparing for the Roth conversion. I decided the benefits of low taxes on Roth conversion outweigh the restrictions on withdrawals and the extra paperwork.
The actual rollover consists of two steps. Because I'd like to keep the assets in my IRA, I would transfer in-kind to a new Fidelity Rollover IRA as a bridge. After that's done, Fidelity needs a letter from me as the administrator of my solo 401k to accept the rollover from my Fidelity Rollover IRA. Then the bridge rollover IRA will be closed. Fidelity will not charge the usual $50 IRA closing fee.
I initiated the partial rollover online with Fidelity last Wednesday. I mailed the transfer of assets form on Thursday. By Tuesday, the rollover is completed. Four business days. Fidelity did a very good job.
With the rollover, I said goodbye to Vanguard Brokerage Service. Vanguard is a great mutual fund company, but its brokerage service is substandard. In order to avoid complications with the rollover, I wanted to change my dividend reinvestment election from automatically reinvest to taking the dividend in cash. I got this nice message when I tried to do so:
Vanguard Brokerage Service is saying their computers for processing dividend reinvestment elections go off their shift at 5 p.m. Eastern time. I honestly cannot think of any reason why computers work only a day shift.
Software picked, likely related posts:
- Solo 401k For Part-Time Self-Employment
- Alternatives to a High Cost 401k Or 403b Plan
- A Non-Deductible IRA Is Worth It For Me
Comments
8 Comments on Rollover IRA to Solo 401k
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Sammy_M on September 30, 2009 |
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HueyLD on October 5, 2009 |
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vigilant1 on October 14, 2009 |
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Rajamadajama on November 18, 2009 |
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Funny, I just did the same last week. I agree the Fidelity Retirement people are good. One thing that I thought I'd mention that you didn't cover in your post. With respect to Fidelity discouraging you from moving the money to the SE401K, I wouldn't worry about not being able to access the money. One of the qualifying event is termination of the plan. With you as the administrator, if you want/need the money, you terminate the plan and move it to a rollover IRA where you can then access it. Easy enough.
Sammy_M – Yeah, terminating the plan would be the nuclear option. I don't think I will need it but I do have that option. When I called Fidelity the second time asking about the wording for the letter of instructions for rolling over the bridge rollover IRA to the solo 401k, the rep knew exactly what I was trying to accomplish.
Rep: "If you don't mind, may I ask why you'd like to rollover money into your 401k?"
Me: "I'm doing a Roth conversion next year."
Rep: "You've made after-tax contributions to your IRA and you'd like to separate your basis?"
Me: "Exactly."
Fidelity reps are great.
I have used Fidelity for all my brokerage need for many years and had been wondering about the quality of VBS. After seeing this post and other posts complaining about the subpar system at the VBS, I stopped thinking about doing business with the VBS.
It appears that VBS is an after thought and Vanguard probably offered the VBS service mainly to accommondate transfers. It is a real shame because Vanguard is such a great mutual fund company. With the proliferation of ETFs, people can own Vanguard funds thru ETFs without having to have an account at Vanguard.
I hope that Vanguard will someday wake up to the new world and integrate their brokerage business into their core fund business for its own sake.
I've had a solo 401(k) at Fidelity for 4 years, they've been helpful. Vanguard ddn't offer them when I set mine up. Now I need to open more funds within the account, and want to go with Vanguard funds. Rather than pay Fidelity $75 per fund to buy into these, I'm moving everything to Vanguard. I guess I'm going exactly opposite to the move you are making. I don't buy/sell stocks or ETFs, so the VBS spectre isn't an issue.
The tax stuff is complex, lots of interconnected variables. For example, before contributing to the Solo 401K my income is in the 25% marginal rate. If I contribute enough, it puts my "last taxable dollar" below the 15% ceiling, which is a good thing. But, (through Dec 2010) there's the Cap Gains rate "sale": 0% CG on everything up to the top of the 15% bracket ($67,900 for 2009). So, it makes sense to add a lot MORE to my solo 401K (even though I've already reduced my taxable income to the 15% bracket-where I expect to be in retirement, so this would normally be a "wash") in order to drive down my taxable income still further and get more headroom between my income and this $67,900 ceiling–so I can sell more of my appreciated assets tax free.
But wait–all this loading of assets into the 401K (money I'm taking from my taxable accounts) leads to another problem down the road. When I withdraw the funds from the 401K, I'll have to pay taxes on the cap gains at the regular income rate, which can be quite a bit higher than the cap gains rate. So–maybe I shouldn't have put those assets in the 401K in the first place. Aggh!
I haven't found an on line calculator that lets me optimize this decisionmaking–I'm just using the TLAR method now. I'm maxing out the solo 401K (salary deferral and profit sharing components) , selling appreciated assets in taxable accounts until I hit the 25% bracket again, and will worry about the tax ramifications when i start withdrawing the money. After all–who knows what the cap gains rates will be in 10 years? In the past they've been all over the place.
Thanks very much for the site. I'm new here, there's a lot of great info.
vigilant1 – Thank you for stopping by. I think you made the right decision. I like the "bird in hand" approach. Take advantage of the capital gains tax "sale" now and worry about the taxes on 401k withdrawals later. There might be other opportunities down the road to lower your taxes.
Great topic, I've been wondering about this myself since 401(k) plans are exempt from the conversion calculations. I have a ton of tax-deferred cash in a SEP-IRA, which gets in the way of funneling non-deductible IRA contributions into a Roth IRA.
Curious why you opted for Fidelity over Vanguard when it comes to your solo 401(k)? You mention unhappiness with VBS — was that the determining factor?
Since I don't have a solo 401(k) (yet), I'm curious what you know about the rollover rules for getting the money back out into an IRA at some point down the road. This is presumably similar to regular 401(k), where you can do so after separation of employment, but how does that work for self-employed? Could you set up a new LLC and start taking your income through that, effectively ending your relationship with your original company?
As an aside, I just realized that my wife doesn't have any traditional (tax deferred) IRA contributions to worry about, so we should be able to do the non-deductible contribution followed by immediate conversion route for her without jumping through any hoops.
nickel – Vanguard's solo 401(k) plan does not accept incoming rollovers from IRAs. It only accepts rollovers from another solo 401(k). That eliminated them from the consideration. I can't think of a good reason to get the money back into an IRA right now. You are in control of the solo 401(k). You can invest in anything you want. The 5500-EZ form is pretty straight forward if you have to file one (> $250k in assets). You can terminate the plan if you really want to.
I just opened up a solo 401(K) at Etrade (called an individual 401(K) on their site) with no fees and with a loan option that Fidelity regretfully does not have. Etrade's financials seem to be improving so I felt safe placing my retirement monies with them. There is no fees associated with the account or with the loans but there also isn't the caliber of customer service that I have been used to having accounts with Fidelity. Do any of you have any experience with Etrade regarding solo 401Ks?
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