About three weeks ago, I wrote about rolling my SEP-IRA holdings (all of which are tax-deferred) into a Solo 401(k). My primary motivation for doing this is to get my pre-tax retirement holding into a so-called “qualified” plan so I can convert non-deductible Traditional IRA holdings into a Roth IRA with minimal tax consequences.
Once again, if you’re not sure what I’m talking about, here are a handful of older posts that describe the issue in more detail:
- Roth IRA Contribtion Limits: How the ‘Phaseout’ Works
- Roth IRA Conversion Limits Going Away
- Look Before You Leap: Roth IRA Conversions in 2010
- Using a Solo 401(k) to Facilitate Roth IRA Conversions
Back when I first talked about this, I noted that I was opening my Solo 401(k) with Fidelity because they’re willing to accept a rollover from an IRA into a Solo 401(k). The first step in the process was to fill out (and submit) a plan adoption form along with an account application.
The next step was to get the money out of Vanguard, where I’ve been holding my SEP-IRA, and into a Rollover IRA at Fidelity. The reason I went this route is that Fidelity can’t accept a direct, trustee-to-trustee rollover into a 401(k) from an outside vendor.
In other words, I either had to do a “double rollover” or request a check from Vanguard and then do a 60-day rollover on my own. Since the trustee-to-trustee rollover is a cleaner solution when it comes to IRA reporting requirements, I decided to Fidelity two-step is actually the simpler option.
The good news is that I was able to do these initial steps simultaneously. That is, I submitted the plan adoption and account application paperwork at the same time that I initiated the rollover. The only wrinkle here was that I needed to stop by the bank for a “Medallion signature guarantee” on the rollover paperwork.
My new Solo 401(k) was created quickly, and I received word last week that the Vanguard-to-Fidelity rollover was complete. In other words, it was time for the last step… The IRA-to-401(k) rollover.
To complete this final step, I needed to fill out and submit the IRA Single Withdrawal Request form along with a letter from me (as the plan administrator) stating that I was willing to accept the IRA rollover into the 401(k) plan.
I filled out that form and drafted the letter over the weekend, and will head to the bank shortly for another signature guarantee. From there, it should only be a matter of days before the entire process is complete. A bit complex, but actually pretty easy, and well worth the trouble since I’ll now be able to beef up my Roth IRA.
Throughout this process, I’ve been very impressed with Fidelity. Their reps answer the phone quickly and are always well informed. Beyond that, I’ve been notified via e-mail every step of the way so I’ve never been left waiting or wondering.
Update: I was able to take care of this whole process (Vanguard SEP-IRA -> Fidelity Solo 401(k) -> Vanguard Solo 401(k)) with very little hassle, and no Rollover IRA. Here’s how I did it:
1. Fill out the paperwork to open a Fidelity Solo 401(k). It’s just a few pages.
2. On the same day, fill out the paperwork to open a Vanguard Individual 401(k). This was a bit of a hassle; I actually needed help from a Vanguard rep to figure out which pages to actually print, fill out, and send in.
3. Mail them both.
4. When you receive confirmation that the Fidelity 401(k) has been opened, go to Fidelity.com and establish your online access. Then, go to http://www.fidelity.com/toa and initiate a Transfer of Assets from your Vanguard SEP IRA directly into your Fidelity 401(k).
5. When the assets hit your Fidelity account (it only took about a week for me), fill out and mail in the Vanguard “Individual 401(k) Asset Transfer Form”, instructing it to move everything from your Fidelity 401(k) to your Vanguard 401(k). This, of course, is assuming that by now Vanguard has successfully opened your Vanguard 401(k).
Done! No rollover IRA, no medallion signature.
First Question: The Fidelity IRA single withdrawal request form indicates that the form results in a taxable IRA distribution. Seems like the idea is that you check the box on the form electing out of tax withholding, ignore the warnings, and authorize the transfer from the Rollver IRA to the Solo 401(k), and the IRS shouldn’t care?
Second Question: I spoke with Fidelity today and described my idea, which is identical to yours. They wondered why I didn’t just use Vanguard’s version of the IRA withdrawal form to authorize a transfer directly from my SEP IRA at Vanguard to my Solo 401(k) at Fidelity? I read to them what you wrote (“Fidelity can’t accept a direct, trustee-to-trustee rollover into a 401(k) from an outside vendor”) but the rep I spoke to said that wasn’t true.
What do you think?
Nickel —
This topic has been very useful for me as my situation is very similar. I too have an employer 403(b) and a SEP for on-the-side consulting monies. And I too am attempting to move my SEP so that I can convert my traditional and rollover IRAs without including the SEP money.
One comment on your strategy: once you have a solo 401K, that is now your retirement plan for your consulting or other work. You can no longer have a SEP as the Fidelity folks explained to me. One retirement plan per self-employed business.
Did you inquire about rolling your SEP into your employer 403(b)? My employer allows me to do this, and that way I can keep a SEP for my consulting money (but now it will start with a zero balance). I can convert it every year to a Roth or, if tax situations change, I can still just use it as a deductible SEP. It seems better to me than the solo 401K option that I was going to do because I can still use the SEP as my self-employment money retirement plan.
Am I missing something? Did you consider this? (Sorry to be asking when your solo 401K is basically complete).