Author Topic: Any reason against i401k?  (Read 4998 times)

milliemchi

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Any reason against i401k?
« on: April 17, 2015, 03:43:51 PM »

Hi all,

My husband recently started receiving self-employment income, and I want to move as much of it as possible into a tax-deferred retirement account of some sort. I did my research on the web, and set my heart on the individual 401k, due to the ability to contribute the largest amount. It seems like the most logical choice, and Vanguard is very helpful throughout the process of setting up.

However, i401k is inconsistently covered in various online tutorials/help pages/FAQs.  SEP IRA and SIMPLE IRA are more consistently discussed. Is this because i401k is a newer product? Or is there a reason why it is a sub-optimal (or unavailable) choice in some situations? Since we don't plan on having any employees soon, it seems a no-brainer, but am I missing something?  I can't see a downside. (The 'Individual 401(k) Basic Plan Document' that Vanguard provides is 80+ pages of small-print, single-spaced legalese. I started reading this afternoon and gave up.)

Thanks.

bacchi

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Re: Any reason against i401k?
« Reply #1 on: April 17, 2015, 04:01:05 PM »
Avoid it at all costs if you hate deferring money!

No, there's nothing wrong with it for a sole employee business. It is fairly new and it's not as complicated as it appears, regardless of Vanguard's documents. Vanguard will occasionally send you amendments that you'll need to sign and return. Easy.

Oh, you might want to search for "solo 401k" or "self employed 401k" for more hits.

TN_Steve

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Re: Any reason against i401k?
« Reply #2 on: April 17, 2015, 04:03:39 PM »
Here is a pretty good & understandable overview of the solo 401(k), aka i401k.  It touches on some benefits and disadvantages when compared to the SEP and Simple options:  http://www.bogleheads.org/wiki/Solo_401%28k%29_plan

The key is to remember that employee contributions are global; if under 50, you can only contribute a grand total of $18,000 to any and all 401k plans.  employer contribution limits are individualized per employer though, I believe.

iamlindoro

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Re: Any reason against i401k?
« Reply #3 on: April 17, 2015, 04:27:11 PM »
I was where you are a little under two years ago.  There was a time where Solo 401(k)s had higher costs associated with them.  This is no longer the case.  The sole real "drawback," if you can call it that, is that there is a little more paperwork to do to establish a Solo 401(k), and a single form you have to do if the combined assets are over 250K.  Do *not* let this dissuade you, though, because the paperwork is still incredibly trivial, and at least at Vanguard, they're happy to sit on the phone with you and interview you and tell you what to put in each box, down to the smallest detail.  There is nothing to be intimidated about.

It has changed my life.  In the past 18 months, I have tax deferred over 100K.  I am not aware of any other single more effective retirement tool.  It turned FI/RE for me from a 10 year plan to a 4-6 year plan.
« Last Edit: April 17, 2015, 07:31:52 PM by iamlindoro »

dhc

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Re: Any reason against i401k?
« Reply #4 on: April 18, 2015, 07:12:16 AM »
I was where you are a little under two years ago.  There was a time where Solo 401(k)s had higher costs associated with them.  This is no longer the case.  The sole real "drawback," if you can call it that, is that there is a little more paperwork to do to establish a Solo 401(k), and a single form you have to do if the combined assets are over 250K.  Do *not* let this dissuade you, though, because the paperwork is still incredibly trivial, and at least at Vanguard, they're happy to sit on the phone with you and interview you and tell you what to put in each box, down to the smallest detail.  There is nothing to be intimidated about.

It has changed my life.  In the past 18 months, I have tax deferred over 100K.  I am not aware of any other single more effective retirement tool.  It turned FI/RE for me from a 10 year plan to a 4-6 year plan.

iamlindoro, what's your plan for getting all of that out of the solo 401(k) when you RE? When I last looked into them I wasn't left with confidence that the usual strategies for accessing tax-deferred money pre-59.5 (SEPP, roth pipeline) were possible.

Perhaps in my case the issue was exacerbated by the fact that our self employment income is a small percentage of our overall income, but also the portion that's most likely to continue past ER, so "separation", which seems to be necessary before any rollovers out of the solo 401(k) would be allowed, would be unlikely.

Davids

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Re: Any reason against i401k?
« Reply #5 on: April 18, 2015, 08:07:13 AM »
The only real argument one could make against contributing to a 401K is if the company you work for(which won't apply to your case) only offers investment options with ridiculously high fees then at that point it might make sense to just contribute up to the company match.

iamlindoro

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Re: Any reason against i401k?
« Reply #6 on: April 18, 2015, 08:28:39 AM »
iamlindoro, what's your plan for getting all of that out of the solo 401(k) when you RE? When I last looked into them I wasn't left with confidence that the usual strategies for accessing tax-deferred money pre-59.5 (SEPP, roth pipeline) were possible.

Perhaps in my case the issue was exacerbated by the fact that our self employment income is a small percentage of our overall income, but also the portion that's most likely to continue past ER, so "separation", which seems to be necessary before any rollovers out of the solo 401(k) would be allowed, would be unlikely.

Any Solo 401(k) should permit rollover to an IRA, the only additional requirement is that you file a form 5500 with the IRS.  Yes, this means you can't open a new one afterwards, but there's nothing saying you can't go on working/receiving income for doing the same kind of work.  You're simply not doing it as that business any more.

iamlindoro

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Re: Any reason against i401k?
« Reply #7 on: April 18, 2015, 08:31:18 AM »
The only real argument one could make against contributing to a 401K is if the company you work for(which won't apply to your case) only offers investment options with ridiculously high fees then at that point it might make sense to just contribute up to the company match.

Davids, you appear to be answering about a regular 401(k).  This question is about Individual 401(k)s, where the plan is selected by the participant themselves.  If you open an Individual 401(k) with high fees, you have only yourself to blame.  No self-employed person should ever be saying "I'd love to save in my 401(k), but my employer is an idiot and selected a terrible plan."

milliemchi

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Re: Any reason against i401k?
« Reply #8 on: April 18, 2015, 10:49:32 AM »

Thank you all for the replies. It is nice to hear from someone who's been there. And I want to second that I am continuously amazed at the high level of service I get from Vanguard.

Two more questions: 

I checked out the Boglehead link, and it says that a maximum of $265,000 of salary can be taken into the i401k. Is that in a year or in a lifetime? Or is it 'taken into account' when calculating employer contributions? The reference that the page provides does not actually mention this restriction at all.  Where can I read more about it? Considering that i401k is an actual 401k, I would be surprised if it had additional restrictions.

iamlindoro - you mention that one cannot open another i401k after a rollover. Do you mean that we only get one shot at setting up the i401k in a lifetime? Is there a reference for this?

I am asking because I have read quite a bit, including on the IRS site, and this is the first time I've heard of either restriction.

Thanks.

iamlindoro

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Re: Any reason against i401k?
« Reply #9 on: April 18, 2015, 11:04:19 AM »
I checked out the Boglehead link, and it says that a maximum of $265,000 of salary can be taken into the i401k. Is that in a year or in a lifetime? Or is it 'taken into account' when calculating employer contributions? The reference that the page provides does not actually mention this restriction at all.  Where can I read more about it? Considering that i401k is an actual 401k, I would be surprised if it had additional restrictions.

There is no such limit.  You can put as much in a Solo 401k as you can in any other.  The Bogleheads link is referring to the maximum amount that can be used in calculating the profit sharing contribution.

iamlindoro - you mention that one cannot open another i401k after a rollover. Do you mean that we only get one shot at setting up the i401k in a lifetime? Is there a reference for this?

I should clarify-- to roll over a Solo 401k to an IRA, since you are the sole participant, this involves closing the plan itself (as opposed to rolling over your own account in a 401k from an employer whose plan goes on).  Because the IRS considers that 401ks, once established, should continue indefinitely, they require that any 401k be terminated "for a valid business reason."  If you close the plan citing retirement/dissolution of business, but then open a new 401k as the same exact business, you risk penalties or worse still, the plan being declared "non qualified" (thus, taxable).  That is *not* to say that you couldn't simply start a new Solo 401k under a new business name, having come out of retirement-- just that if you open, then close, a Solo 401k, trying to start a new one under the same business name is risky.

http://www.pgiselfdirected.com/2014/04/17/terminating-your-solo-401k-plan-irs-requirements/
http://www.irs.gov/irm/part7/irm_07-012-001.html#d0e683
« Last Edit: April 18, 2015, 11:13:03 AM by iamlindoro »

Davids

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Re: Any reason against i401k?
« Reply #10 on: April 18, 2015, 03:08:25 PM »
The only real argument one could make against contributing to a 401K is if the company you work for(which won't apply to your case) only offers investment options with ridiculously high fees then at that point it might make sense to just contribute up to the company match.

Davids, you appear to be answering about a regular 401(k).  This question is about Individual 401(k)s, where the plan is selected by the participant themselves.  If you open an Individual 401(k) with high fees, you have only yourself to blame.  No self-employed person should ever be saying "I'd love to save in my 401(k), but my employer is an idiot and selected a terrible plan."
That is why I had in parenthesis (which won't apply to your case).

milliemchi

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Re: Any reason against i401k?
« Reply #11 on: April 18, 2015, 07:24:28 PM »

Thanks for clarification!


dhc

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Re: Any reason against i401k?
« Reply #12 on: April 18, 2015, 10:31:41 PM »
I should clarify-- to roll over a Solo 401k to an IRA, since you are the sole participant, this involves closing the plan itself (as opposed to rolling over your own account in a 401k from an employer whose plan goes on).  Because the IRS considers that 401ks, once established, should continue indefinitely, they require that any 401k be terminated "for a valid business reason."  If you close the plan citing retirement/dissolution of business, but then open a new 401k as the same exact business, you risk penalties or worse still, the plan being declared "non qualified" (thus, taxable).  That is *not* to say that you couldn't simply start a new Solo 401k under a new business name, having come out of retirement-- just that if you open, then close, a Solo 401k, trying to start a new one under the same business name is risky.

http://www.pgiselfdirected.com/2014/04/17/terminating-your-solo-401k-plan-irs-requirements/
http://www.irs.gov/irm/part7/irm_07-012-001.html#d0e683

Thanks for the additional details, iamlindoro.

In our case, the business is a sole proprietorship and shares a name with one of us, so reading the irs guidance you linked to reinforces my discomfort with being able to claim a valid business reason for closing a plan if we were still getting income that way. If the income from that business ever grows enough to be a non-trivial portion of what we're making, I suspect our best options would be to either legally create an actual business as a separate entity or to simply plan on the solo 401(k) portion of our savings being the portion we didn't touch until normal retirement age.