Author Topic: Need some advice....Fidelity self-employed 401k, reverse rollover, etc  (Read 4209 times)

WorkingToBeFIREd

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Hi all - hoping the collective can help!  I went ahead and FIRE'd myself from my "day job" in December 2014 to focus on my rapidly expanding side hustle business, which is as much a passion as it is an income stream.  Currently I'm the only employee, and two years ago I setup a self-employed 401k with my adviser to reinvest some returned 401k contributions from my former employer's plan, as well as push a good chunk of the side-hustle profits out of reach of the tax man.  This worked well and (in this case), the adviser's direction was worth some bucks to me since it helped save a bunch of money on taxes.  That said, he's been paid via the "management fee" for two years and I want to move into something with better fund choices and low costs.

My first choice naturally was Vanguard.  I had rolled over my 401k into an IRA there, and have most of my investments consolidated or moving there.  Unfortunately, because I now have an IRA, I can't do my annual back door Roth conversion that my wife and I have done each year, and we will be over the direct contribution limits.  I know there's a way to pro-rate the contribution over the total IRA amount and pay tax, blah, blah, blah - that feels like a ton of math and a PITA.  More Googling brought up a "reverse rollover", where I move the IRA funds back into a 401k, which would then allow me to do the Roth back door conversion.  Imagine my dismay when I learned that Vanguard doesn't accept rollover IRA contributions into their 401k....even from Vanguard IRAs!  :(

I'm now looking at Fidelity, and their self-employed 401k plan seems pretty good - no admin fees/percentage of asset fees, access to a ton of mutual funds (including Spartan Advantage), etc.  The only fee I can find is a $50 account termination fee if I ever have to close out the plan (hire employees, move/sell the biz, etc) - I can live with that.

If you've made it this far - thank you!  Questions are:
  • Anyone currently using the Fidelity Self-Employed 401k have anything good/bad/other to say about it?
  • Currently my Rollover IRA at Vanguard is in VTSAX, VBTLX, and VTABX.  I can find equivalent Spartan funds for the first two (FSITX and FSTVX, respectively) but nothing to match VTABX (international bonds).  Any recommendations?  I checked on Fidelity's site and it doesn't look like I can hold the Vanguard Admiral share funds at their brokerage.
  • Based on when I rolled over my former employer's 401k to Vanguard, I'm showing a short-term capital loss of approximately $5K.  Is this something I need to worry about from a tax perspective, or is it a moot point since the IRA funds are being moved right back into a 401k?  I will already have a long-term capital loss of about $2,500 this year due to selling and consolidating other investments to Vanguard, but as I'm not receiving any distributions from the Vanguard IRA for the reverse rollover, I'm assuming this won't impact things.
  • If I do a "reverse rollover" back to the Fidelity 401k so that I no longer have any non-Roth/Rollover IRAs, I'm assuming I can do the back door Roth conversion in this tax year?
I planned on moving the 401k plan anyway to get away from the adviser fee of 1% (especially since with a reverse rollover that would be a horror show), but it seems like I will also get the benefit of easier Roth contributions back again.

Any "gotchas", issues, or recommendations/advice based on the above?

Thanks in advance....
« Last Edit: June 04, 2015, 07:55:42 PM by WorkingToBeFIREd »

data.Damnation

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Capital gains and losses are not taxable events when they occur inside a 401(k) or IRA, that's the main advantage of them. The only tax you pay is ordinary income tax when you make withdrawals or conversions.

I'm also self employed and I thought about opening a solo 401k but decided against it because you can't do withdrawals (including for Roth conversions) without shutting down your company, unless you find a broker that allows in-service withdrawals (Fidelity and Vanguard do not and I'm not aware of anyone who does). Is your plan to not touch this money until you shut down your company or turn 59.5?

WorkingToBeFIREd

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Thanks data.Damnation - much appreciated!  I thought that might be the case on capital losses inside a 401k/IRA, so outside of the obvious reason of not taking a $5K loss in capital (ahhhh - market timing!), there doesn't sound like there are any other reasons not to move it.  In hindsight, I should've researched solo 401k options more thoroughly in anticipation of moving from my current plan before I rolled my former employer's 401k over so I could've done one straight transfer, but I'll take the facepunch and chalk it up to a learning experience.

I spoke with two different reps on the Fidelity small business team and both cautioned me on the drawbacks to doing the reverse rollover from the IRA back into the 401k, including the penalties for early withdrawal, no loans, etc.  Right now there's no need to tap into the money for the foreseeable future, and I expect one of three likely scenarios will happen prior to then anyway:
  • Continue to build the business and sell it outright some time in the future, "firing" myself and ending the plan.  I'd roll the assets back into an IRA.
  • Build the business and bring on partners, employees, etc.  Step away from the day-to-day and bask in the passive-ish income.  :)  Since I'd now have employees, I would need to terminate the solo 401k and could either opt to not replace it (rolling assets back to an IRA), or move to a SIMPLE IRA or SEP-IRA (will want to verify assets can be rolled in).
  • Something else that I haven't thought of yet. :)
On VTABX, I will probably just go with the two Spartan funds that are equivalent to Vanguard and then realign my asset allocation to keep international bonds at Vanguard, probably in the Roth account.

Any other Fidelity self-employed 401k users out there that can comment on their experiences?

Thanks again!
« Last Edit: June 04, 2015, 07:58:46 PM by WorkingToBeFIREd »

WorkingToBeFIREd

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Spoke with Fidelity yesterday....if at some point I grow the business and/or bring on employees, I can roll the self-employed 401k plan over into a SEP-IRA.  I would not be able to roll it over into a SIMPLE IRA...they can only take rollover contributions to that from other SIMPLE plans.

I'm also amazed there's no electronic way of getting funds to Fidelity (either for employer or employee contributions), but as there's a Fidelity office about 10 min from my house, I can stop by there once a month to drop off a check and save the cost of the stamp.  :)

With some of the searching/reading I've done on this board and others, Fidelity is looking like the better bet for my situation.


tljohnsn

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I just opened a self-employed 401k with fidelity a few days ago.  They informed me on the phone that I could transfer money from the business checking account into my fidelity taxable account, and then direct them to transfer from there into the 401k with a phone call.  Could save you a trip to the post office.

DavidAnnArbor

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I opened up a Fidelity Self-Employed 401k at the beginning of this year. I really like it because I can save a lot more money in it than I would have been able to with a SEP-IRA. Also the Spartan Advantage mutual funds have lower expense ratios than the Vanguard Investor class mutual funds that the Vanguard plan was limited to. There's a Fidelity branch that's also a 12 minute drive from my house so I just went over to give them a check. I just plan to deposit the money once a year, the employee elective deferral. I already deposited $20,000 for this year. Because I turn 50 this year I can put up to $24,000. I bought FSTVX (Spartan Total Market Index Fund - Fidelity Advantage) and FSIVX (Spartan International Index Fund - Fidelity Advantage)

Money Stoic

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Any "gotchas", issues, or recommendations/advice based on the above?

Thanks in advance....

Do you wish you had gone SEP or Simple to begin with now?

WorkingToBeFIREd

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Quote from: tljohnson
I just opened a self-employed 401k with fidelity a few days ago.  They informed me on the phone that I could transfer money from the business checking account into my fidelity taxable account, and then direct them to transfer from there into the 401k with a phone call.  Could save you a trip to the post office.

Thanks tljohnson!  You're right...they did mention an option to have the amount deducted electronically, although it would still necessitate a call to make the contribution and allocate correctly (employer/employee).  For employee contributions, I need to drive right by the Fidelity office once a month anyway, so it'll be a combined errand, and I'll do the employer contribution as a one-shot deal when I know the max amount that can go in.

I opened up a Fidelity Self-Employed 401k at the beginning of this year. I really like it because I can save a lot more money in it than I would have been able to with a SEP-IRA. Also the Spartan Advantage mutual funds have lower expense ratios than the Vanguard Investor class mutual funds that the Vanguard plan was limited to. There's a Fidelity branch that's also a 12 minute drive from my house so I just went over to give them a check. I just plan to deposit the money once a year, the employee elective deferral. I already deposited $20,000 for this year. Because I turn 50 this year I can put up to $24,000. I bought FSTVX (Spartan Total Market Index Fund - Fidelity Advantage) and FSIVX (Spartan International Index Fund - Fidelity Advantage)

Thank you....sounds like it's working well, and you're in the exact same funds I'm looking at.  I'm sub-50 so limited to the standard $18K employee contribution, but will also max the employer side as well.  I'm probably going to call Fidelity this week and get the ball rolling...really haven't find many other options I like as well as Fidelity.

Do you wish you had gone SEP or Simple to begin with now?

Hi Money Stoic - I think the 401k is still the better option, at least for my current situation.  After researching the available plan options, I don't think I'd be able to contribute the $18K from the employee-side into the SEP-IRA, just employer contributions based on profitability...not bad, but less than I'd like.  The SIMPLE IRA will allow employee contributions, but is capped at $12,500 for employee contributions versus the $18K of the 401k.  The employer match/contribution limits also look lower as well.  Finally, with "IRA" in the title, I'm not sure if either of those will cause me issues with going back to doing back-door Roth conversions, which is one of the reasons I'm doing the reverse rollover into the 401k.  Depending on where things go with the business, I may look at the SEP-IRA or SIMPLE in the future if I bring on employees, but am hoping to cram as much into the self-employed 401k as possible for as long as I can.  :)

Thanks to all for your feedback and experience - greatly appreciated!


Anomalous

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I opened a self-employed 401k with Fidelity a few months ago. Not long enough to provide much of an opinion on it yet, but no complaints so far.

The biggest hassle has already been mentioned multiple times: contributions can't be made through the web site. The Fidelity office closest to me is about 120 miles away, so doing transactions in person is not reasonable. One of their phone representatives told me they're working on a system to allow contributions online, but there's no ETA on it.

The couple times I've had to call, the customer support people have been knowledgeable and helpful. Hold times are longer than I like though.

If you don't see any Spartan mutual funds that match the investments you want to make, keep in mind that Fidelity also has commission-free trades of a bunch of iShares ETFs. You might check those and see if any match what you want to invest in. Of the few that I checked, the iShares ETFs had lower expense ratios than the Investor class Spartan funds ($2500 minimum), and very slighter higher expenses than the Advantage class Spartan funds ($10k minimum.)

WorkingToBeFIREd

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Thanks Anomalous - appreciate your feedback/experience so far!  I'm lucky in that a Fidelity office isn't far from me (and right on the way for another monthly errand anyway, so I can bulk trips together), but it just seems odd they don't have an electronic way to do it.  Then again, if that's the only detriment to Fidelity's plan, I can live with it...I really want to dump my existing SE plan, along with it's high ER funds and asset management fee!

I will also check out the iShares - thanks for the tip; maybe they have a few other options to investigate.

Best Regards...