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Old 11-03-2013, 04:09 PM
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Change from SEP of 401K

This year, I opened a self employed 401K while I still had a SEP IRA. No money was contributed to the 401K and The SEP has not been rolled yet. I intend to roll it into either an IRA or the 401k once this is resolved. I am told I need a tax advisor to guide me through this correction so please advise as to how I correct this. Thank you.



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Old 11-04-2013, 02:42 AM
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Originally Posted by jhester22 View Post
This year, I opened a self employed 401K while I still had a SEP IRA. No money was contributed to the 401K and The SEP has not been rolled yet. I intend to roll it into either an IRA or the 401k once this is resolved. I am told I need a tax advisor to guide me through this correction so please advise as to how I correct this. Thank you.
The SEP IRA is an employer sponsored retirement plan that makes contributions directly to an IRA on behalf of the employee. As a SEP IRA, the contribution limits are higher than reg. IRAs, allowing greater retirement savings. A rollover moves money from one qualified retirement plan to another, preserving the tax-deferred structure. You, as a retirement plan participant, must follow IRS regulations to ensure the movement of the money is not taxable. Rules include only performing one rollover every 12 months. Direct rollovers never allow funds to pass through your hands, but indirect rollovers do. When that happens, you must complete the rollover within 60 days. There is also a withholding issue when dealing with the indirect rollover; the IRS holds 20 percent in the event the rollover won't be completed. When the funds are deposited back into the rollover account UNLESS it is from IRA to IRA I guess, the 20 percent must be made up from personal funds until it is returned after your tax filing.When you leave the employer who sponsored the SEP IRA, you have the option to rollover assets into another qualified plan such as a self-directed IRA or a new employer's plan. The IRS allows rollover to any plan that will accept the assets. It is up the 401k custodian to determine whether it will accept the funds. The custodian has the option of allowing roll-ins to the plan when establishing the 401k plan adoption agreement. If the 401k plan administrator doesn't accept money coming in, then the only options are to keep assets with the SEP IRA administrator or roll the money into a self-directed IRA. Many employer retirement plans have a vesting schedule. Vesting is how much of an employer's contribution is yours as the employee. The schedule is based on years of service, either creating ownership after a three-year threshold or by 20 percent annually over a five year service term. SEP IRAs have assets vested 100 percent upon the contribution of the employer. This means that 100 percent of the SEP IRA is eligible for rollover at any time.It is convenient to roll assets into a new 401k plan; all your retirement assets are in one place making monitoring and management easier. Costs are often reduced in employer sponsored plans due to the high number of participants. Though convenient, keeping assets in an employer's plan reduces the options available to you, the investor.
NOTE: Technically, the SEP IRA and the Traditional IRA are the same type of account. The only difference is that the SEP IRA is allowed to receive employer contributions. Therefore, you can combine the SEP IRA into the Traditional IRA without any ramifications. When doing so, move the assets as a (nonreportable) trustee-to-trustee transfer. Whether a conversion is good for you depends of your financial profile. In general, if you can afford to pay the taxes that would be due on the conversion and your tax bracket during retirement will be higher than your tax bracket now, then it makes sense to convert your assets to the Roth IRA. That may sound very general, but only someone familiar with your finances could make a specific recommendation.



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Old 11-07-2013, 10:33 PM
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Thanks for the response. There is one aspect that wasn't addressed and was brought up to me. That is that I opened the 401k in the same year that the SEP IRA was still active. I did not make contributions to both in the same year, but the 401K custodian advised that I needed to make date changes in order to not get in trouble with the IRS. Is that true? If so, what do I need to do?



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Old 11-08-2013, 08:10 AM
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Originally Posted by jhester22 View Post

That is that I opened the 401k in the same year that the SEP IRA was still active. I did not make contributions to both in the same year, but the 401K custodian advised that I needed to make date changes in order to not get in trouble with the IRS. Is that true? If so, what do I need to do?
I do not think so; the IRS rules allow for both Solo 401k and SEP IRA contributions in the same year/same time. however, an issue to consider is whether you’d like to have the option of borrowing against your retirement plan by using your retirement plan's balance as collateral and receive an Individual 401k loan. IRS rules do not permit a loan in a SEP IRA, but an Individual 401k loan of up to half of the plan's value up to a $50K maximum is allowed. if a Solo 401(k) Plan engages in certain types of "prohibited transactions" it may trigger a prohibited transaction which could lead to disqualification of the Solo 401(k) Plan and severe tax consequences.

NOTE:There is no exclusive plan rule for a Solo 401(k) Plan and SEP IRA. Only a SIMPLE IRA has an exclusive plan rule, meaning one can not combine a Solo 401k Plan with a SIMPLE IRA. Even though you can have a SEP along with a Solo 401(k) plan, there is generally not many benefits of having both plans established for a business. the reason behind this is that the Solo 401(k) Plan provides participants with more advantages than a SEP IRA. For example, a SEP IRA only includes an employer profit sharing component (20% of compensation for the self-employed and 25% for S and C Corporations), whereas, a solo 401(k) plan, also known as an individual 401(k) plan, includes an employee deferral component ($17,000 if you are under 50 or $22,500 if you are over 50) plus an employer profit sharing contribution option. Hence, it typically does not make much sense to have both a SEP IRA and a Solo 401(k) Plan since the Solo 401(k) Plan, also known an individual 401K offers the plan participants higher deferral options, plus additional features such as a $50,000 tax and penalty free loan.



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