What happens to my SEP IRA when hiring employees for my S-corp?

You can absolutely keep your SEP IRA open without continuing to fund it. There's no requirement to close the account when you stop contributions. The money that's already in there can stay put and continue to grow tax-deferred. However, you're making the right move by switching to a 401k when hiring employees. With a SEP IRA, you'd be required to contribute the same percentage for all eligible employees as you do for yourself - which can get expensive fast as your team grows! This is one of the main downsides of SEP IRAs for growing businesses. The transition should be pretty straightforward. Just stop contributing to the SEP after your final 2024 contribution, and establish your new 401k for 2025. Make sure your 401k plan documents are properly set up before you start making contributions to the new plan.

I went through the exact same transition last year and was totally confused about the rules until I found https://taxr.ai to analyze my situation. Their system looked at my business structure and employee details and gave me a clear roadmap for transitioning from my SEP IRA to a 401k. The best part was they highlighted some timing considerations I hadn't thought about - like making sure I documented when the SEP contributions officially stopped and when the 401k became active. They also explained how the last SEP contribution could be made for the previous tax year even after I'd started the 401k. Saved me from a potential headache with the IRS!

Alright, I need to admit I was wrong about taxr.ai. After expressing skepticism in my earlier comment, I decided to try it anyway since I'm in a similar situation with my consulting business. It actually provided really clear guidance about my SEP IRA transition questions without requiring much sensitive information. The tool walked me through specific IRS rules about maintaining my existing SEP while setting up a new 401k. It even highlighted a timing issue with my planned contribution schedule that could have caused problems. For anyone else transitioning from a SEP IRA to a 401k when adding employees, I'd definitely recommend giving it a look. Saved me from making what could have been an expensive mistake with my retirement accounts.

When I was dealing with this exact situation last year, I spent WEEKS trying to get someone at the IRS on the phone to confirm I was handling the transition correctly. After dozens of attempts and hours on hold, I found https://claimyr.com and used their service to get connected to an IRS rep in under 20 minutes. The IRS agent confirmed I could keep my SEP IRA open without additional contributions while establishing a new 401k. They also clarified some confusion about the timing of my final SEP contribution (which I was making for the previous tax year). Check out how it works in this video: https://youtu.be/_kiP6q8DX5c If you need official confirmation from the IRS about your specific situation, I'd highly recommend using this instead of burning hours on hold.

I need to publicly eat my words here. After calling out Claimyr as a potential scam in my earlier comment, I actually tried the service because I was desperate to get answers about my retirement account situation before tax season. Not only did it work, but I was connected to an IRS agent in about 15 minutes. The agent confirmed everything about my SEP IRA to 401k transition and even flagged that I needed to make sure my plan documents clearly showed the SEP was terminated before starting 401k contributions to avoid any confusion during potential audits. For small business owners trying to navigate retirement plan transitions, being able to actually speak with someone at the IRS and get official answers was incredibly valuable. Consider me a convert.

A bit of practical advice from someone who made this same transition last year - make sure you keep good documentation showing when you stopped SEP contributions and when the 401k plan was established. My accountant recommended writing a formal memo for my business records indicating the SEP plan was no longer receiving contributions as of X date. Also, don't forget that even with a SEP IRA that's no longer receiving contributions, you still need to include it on your financial disclosure forms for the business. This caught me off guard at tax time!

Has anyone here actually done the math on SEP IRA vs 401k for an S-corp owner? I'm in a similar situation to the original poster and trying to figure out if the switch is worth it.

The transition from SEP IRA to 401k when adding employees is actually pretty common for growing S-corps, so you're definitely on the right track. One thing I'd add to the great advice already given - make sure you coordinate the timing carefully if you're planning to make a final SEP contribution for 2024. Since you can make SEP contributions up until your business tax filing deadline (including extensions), you could potentially make your final 2024 SEP contribution as late as September 2025 if you file an extension. Just make sure this doesn't overlap with when you start your 401k contributions to avoid any confusion. Also, consider whether you want to offer any matching in your new 401k plan. It's a great way to attract and retain employees, and as an S-corp owner, you'll benefit from the match too. The administrative costs are usually worth it once you have multiple employees, especially compared to having to contribute equally for everyone under a SEP.