Jump to content

Terminate Solo 401k to consolidate into SEP IRA


jjfacejj

Recommended Posts

I have a Fidelity Solo 401k and a Schwab Prototype SEP IRA (so not using the IRS 5305-SEP agreement).

I initially had the SEP for a couple of years but then my income jumped and was expected to continue indefinitely so I opened up the solo 401k. Unfortunately my income has reverted back to what it was before I set up the solo 401k (after just 2 years).

I came to the conclusion that I would prefer to maintain the SEP IRA and terminate the 401k. I don't need to the higher contribution amount and appreciate the simplicity, ease of funding and accessibility of funds for the SEP.

So how do I go about terminating the solo 401k and are my circumstances a good enough reason to do so?

From what I have read I would:

1. Contact fidelity and amend the plan to add the termination to the plan document.

2. File a 5500EZ within 7 months

3. Rollover the 401k to the SEP IRA.

Anything else? Anything to watch out for?

Link to comment
Share on other sites

I think you have the actions right, but to be precise you want to roll over the plan assets and then file the 5500EZ, after you know how much was distributed. A plan is supposed to be "permanent" but that isn't defined anywhere...I don't think I'd worry about it.

Ed Snyder

Link to comment
Share on other sites

Thank you for the reply and the correction - that makes sense.

Say in 2016 I can make a $10k employer contribution into my SEP IRA OR a $10k employer plus and a $18k employee contribution to a solo401k. But I decide to terminate my 401k in 2016.

Okay the first part sounds like a stupid question but I am afraid I'm going to mess something up so bear with me. If I terminate the 401K say in early 2016 and roll it over into the SEP IRA. I can still make a SEP employer contribution of $10k in 2016 right?

But instead could I contribute to the 401k sometime in 2016 before termination and therefore get access to the higher full $28k limit for the 401k for that year. Then roll it over into the SEP IRA later that year? Any issues with that?

Thank you again!

Link to comment
Share on other sites

You could do that, as long as your income while the plan was open was adequate (if you are a sole proprietor, income is deemed to be earned on the last day of the year, so it doesn't work).

To be honest, once you have a 401(k), there's no big advantage to terminating it, since you have the final return requirement (Form 5500EZ) no matter when you terminate it. But if you do just want to be rid of it, I would not do it in the same year I was making contributions to it. If you want to make a contribution in 2016, then terminate it 1/1/2017 and distribute assets in 2017. There are issues with making contributions in/for short years that you just don't need to mess around with.

Ed Snyder

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...