Sweeping funds from Solo 401K to an IRA

[samclem]

I'm self employed now and have been stashing funds into a solo 401K (to reduce my taxes each year). The account is with Fidelity (in a brokerage acct) with money roughly split between one Fidleity MF and one Vanguard MF. It has worked out well.

All my other investestments are with Vanguard. Vanguard doesn't offer solo 401Ks.

The expenses are low, so I'm not paying a $$ price for present setup. Still, it would be helpful to be able to transfer most of the funds to a conventional IRA at Vanguard every few years. Ths would have several advantages:
-- I'd have more funds under management at Vanguard.
-- There are additional IRS reporting requirements (Form 5500) when a solo 401K exceeds $100K in assets. If I could periodically transfer the funds before they reach this level, I could avoid this hassle.

When you have a regular employer, you pretty much have to leave your job in order to transfer funds from a 401k to your IRA. But as a self-employed person, it would seem there might be a way to terminate the 401K plan (fire myself?), transfer the 40K funds to an IRA, then start up the plan again when I'm re-hired the next day. Also, don't some employers allow 401K transfers to IRAs without termination of employment? Heck, I'm an enlightened employer, I would certainly allow my employee (me) to transfer these funds!

Ideas welcomed.

[FinanceDude]

Originally Posted by samclem

I'm self employed now and have been stashing funds into a solo 401K (to reduce my taxes each year). The account is with Fidelity (in a brokerage acct) with money roughly split between one Fidleity MF and one Vanguard MF. It has worked out well.

All my other investestments are with Vanguard. Vanguard doesn't offer solo 401Ks.

The expenses are low, so I'm not paying a $$ price for present setup. Still, it would be helpful to be able to transfer most of the funds to a conventional IRA at Vanguard every few years. Ths would have several advantages:
-- I'd have more funds under management at Vanguard.
-- There are additional IRS reporting requirements (Form 5500) when a solo 401K exceeds $100K in assets. If I could periodically transfer the funds before they reach this level, I could avoid this hassle.

When you have a regular employer, you pretty much have to leave your job in order to transfer funds from a 401k to your IRA. But as a self-employed person, it would seem there might be a way to terminate the 401K plan (fire myself?), transfer the 40K funds to an IRA, then start up the plan again when I'm re-hired the next day. Also, don't some employers allow 401K transfers to IRAs without termination of employment? Heck, I'm an enlightened employer, I would certainly allow my employee (me) to transfer these funds!

Ideas welcomed.

Take a look at the plan document you signed. It should allow non-hardship transfers when you want. There's an IRS provision for that in the code. If it doesn't have it, see if the custodian can get it amended to your plan.

[samclem]

Apologies for the "bump," additional info provided for those whio may be in tis boat.

Okay, I've learned a little more:
- The standard solo 401K plan document (supplied by Fidelity) does not allow in-service roll-overs or transfers. The allowed triggering events for distributions are:
-- Turning 59 1/2 YO
-- termination of the plan

- Termination of the plan: The IRS says this can only be done for a "valid business reason." I'm sure it's a vague line, but it would be good to create be able to show at least some fig leaf a good rationale for terminating the plan.

- Also, according to the Fidelity rep, the IRS will not allow a business to set up another plan within 12 months of terminating a plan. So, you'd either need to watch the calendar (make a contribution in June 09, terminate the plan and transfer assets to a traditional IRA in July 09, establish a new plan in Aug 10 for that tax year) ) or just start a "new business" with a new solo 401K a month after terminaton of the old solo 401K.

Wasn't some presidential candidate talking about simplifying/making all these various retirement plans rational? I wonder who that was, if I voted for him/her, and if it will ever happen.

[ziggy29]

Originally Posted by samclem

- Termination of the plan: The IRS says this can only be done for a "valid business reason." I'm sure it's a vague line, but it would be good to create be able to show at least some fig leaf a good rationale for terminating the plan.

Presumably they do this so people don't get around the $5,000 limit to an IRA by opening a new solo 401K each to get the higher contribution limits and then "terminating the plan" each year to roll the higher amount into an IRA. Basically closing a potential loophole, I'd say.

[samclem]

Originally Posted by ziggy29

Presumably they do this so people don't get around the $5,000 limit to an IRA by opening a new solo 401K each to get the higher contribution limits and then "terminating the plan" each year to roll the higher amount into an IRA. Basically closing a potential loophole, I'd say.

I guess. But you'd still need self-employed income to make the solo 401K contributions, so preventing these rollovers/transfers does not reduce the amount of money someone can put into these various accounts each year. It just serves to keep them from being consolidated.

[mn54]

It is my understanding that the new requirement for having to file form 5500 is $250,000, not $100,000. I got a letter at the beginning of the year explaining the change.

[haha]

Originally Posted by samclem

Ideas welcomed.

This seems like a lot of hassle and some administrative/ legal risk for very little effect.

Plus, you would be teaching Fidelity not to make this available, because of people like you playing games and destrying the programs profitability.

ha

[Peter]

Originally Posted by samclem

-- There are additional IRS reporting requirements (Form 5500) when a solo 401K exceeds $100K in assets.

The threshold is now $250k.

Peter

[samclem]

Yes, the rules have changed since my original post--there's no form 5500 required until the assets hit $250K. That is unless you terminate the plan, in which case a 5500 must be filed regardless of the $$ in the plan.

Originally Posted by haha

This seems like a lot of hassle and some administrative/ legal risk for very little effect.

I agree. I posted the update because the thread initially suggested that doing a transfer or rollover without actually terminating the plan might be simple. It isn't (at least as far as I can tell)

Originally Posted by haha

Plus, you would be teaching Fidelity not to make this available, because of people like you playing games and destrying the programs profitability.

ha

Somebody is always spoiling it for everyone else--it might as well be me! But seriously--Fidelity offers these solo 401k plans in order to get more assets under management, and it works. They have my money. OTOH, if there is a legal way I can move these funds to reduce my costs, I'd be dumb not to do it. If they don't like it, they can make a rule preventing the transfers. Apparently--they already did! (or, rather, they deliberately did not include, and do not allow, in-service transfers as part of their boilerplate "plan document." They could just have easily allowed these transfers--I think some employers do).

Anyway, Fidelity is a good company and their no-fee solo 401K has been a good deal for me. I'd continue to recommend it for sole proprietors or husband/wife teams. They make it possible to reduce taxable income by quite a bit more than is possible with SEP IRAs, etc.

[FurBall]

My solo 401k plan at Schwab also doesn't allow in-service transfers as part of the boilerplate plan document.

[jazz4cash]

My mega corp 401k (at Fidelity) allows in-service rollovers penalty free to any IRA. My current 401k (also at Fideltiy) does not, so it depends on what's in the SPD. Other in-service withdrawal rules exempt hardship withdrawals incl medical and education expenses.

I would think lack of having the rollover provision might be legitimate business reason to terminate the plan.