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Rolling Old 401k Plans or IRAs into Your Small Business 401k Plan
By Jason Watson, CPA
Posted Saturday, November 5, 2023
Other benefits of having a 401k within your business include being able to consolidate other plan assets such as profit sharing, money-purchase plans, traditional IRAs and SEP IRAs into your 401k plan. You can gain some elegance with this- for example, often times your IRA will have both deductible and non-deductible contributions. You could roll the deductible contributions into your solo 401k plan and roll the non-deductible contributions into a Roth IRA or Roth 401k (a Roth conversion). No, Roth IRAs cannot be rolled into your 401k unless the 401k has a Roth option.
Another benefit comes from backdoor Roth conversions. When converting a non-deductible IRA contribution to a Roth IRA, all your IRAs are considered even the pre-tax (deductible) ones. Your conversion is subject to “pro-rata” rules which is summarized by SmartAsset.com as “if your traditional IRA contains both pre-tax (deductible) and after-tax (non-deductible) contributions, the Pro-Rata rule dictates that your Roth conversion will be taxed proportionate to your pre- and post-tax percentages.”
Therefore, a solution is to take all your pre-tax IRA contributions and roll them into your solo 401k plan. This leaves only the after-tax contributions behind which can then be converted to Roth without tax consequences.
Some words of caution. Rolling old IRAs and such into your shiny new self-employed 401k plan might not be the best idea. In some cases, the rollovers will be captive or trapped in the 401k plan. For example, let’s say you have a $50,000 IRA and you move it into your 401k. Two years later you have a crisis and need to access the $50,000. Your 401k plan might not allow you to withdraw this money without a hardship provision, have an in-service rollover or allow loans against the plan assets. These features, or some would say are poorly documented limitations, vary among plan providers.
Another concern is the filing of a 5500-EZ tax form. This is not a massive problem, but once your 401k plan reaches $250,000 in plan assets, you must file a 5500-EZ each year.
Also, 401k plans (beyond the solo 401k plans) might have higher fees and fewer options. In our observation, many 401k plans have an annual asset management fee of 1.5% to 3.0% of assets, whereas most IRAs (and solo 401k plans) operate for less than 1.5% annually. There are kickbacks from the asset managers to the 401k plan administrators which is why you see some administrators like Wells Fargo offering free 401k plans.
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