Author Topic: Can I do a Backdoor Roth conversion if I have a SEP IRA?  (Read 3155 times)

greenjb

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Can I do a Backdoor Roth conversion if I have a SEP IRA?
« on: September 29, 2017, 08:01:19 AM »
I was planning to do a backdoor Roth conversion for a Traditional IRA. In preparation, I rolled a Rollover IRA into my 401(k), then tried to do the same with a traditional SEP IRA -- but I just got a letter from my 401(k) administrator, Empower Retirement, informing me that they won't let me roll a SEP IRA into my 401(k). My question is: am I stuck? As I understand it, I can't do the backdoor Roth conversion for my tIRA unless I've eliminated (rolled into my 401(k)) any pre-existing IRAs. Does anyone have advice on how best to proceed? I have about $12.5K in the traditional IRA I'm hoping to convert to Roth, and about $17.5K in the SEP IRA.

Related question: my wife also has a $12.5K traditional IRA that I was going to convert to a backdoor Roth at the same time I did my own. Can she still do a backdoor conversion even if I have a traditional SEP IRA that (I assume) prevents me from doing this?

Thanks for any tips/advice.

DavidAnnArbor

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #1 on: September 29, 2017, 08:45:07 AM »
I believe each person's IRA is treated separately, so the 2 of you shouldn't have to worry about the other person's pro-rata rules for this backdoor roth conversion, you just have to worry about your own issue.

IN the case of your 401k not allowing a rollover from your SEP-IRA that is a conundrum.
Solution could be to right away start your own self-employed business, and then start a Individual or Solo 401k plan with either Fidelity or Vanguard. First, Make sure that either Fidelity or Vanguard's Individual 401k plan allows a rollover from a SEP IRA. If so then proceed to generate some self employed income, whether you become a dog walker, baby sitter, freelancer, or any other job. Then set up the Solo 401k Plan. Roll your SEP-IRA into it. And voila, no more IRA's to have to worry about regarding your ability to avoid the pro-rata rule for the back door Roth rollover.

dandarc

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #2 on: September 29, 2017, 08:57:57 AM »
Another option - if the SEP-IRA is small would be to convert it to a Roth IRA.  Pay the taxes now, paving the way for the future.

Or roll the SEP-IRA to a regular IRA, then roll that into your 401K.  Kind of an arbitrary line to set - "we'll take incoming rollovers from IRAs but not SEP-IRAs", but if that's what the plan says.

greenjb

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #3 on: September 30, 2017, 06:52:50 AM »
Another option - if the SEP-IRA is small would be to convert it to a Roth IRA.  Pay the taxes now, paving the way for the future.

Or roll the SEP-IRA to a regular IRA, then roll that into your 401K.  Kind of an arbitrary line to set - "we'll take incoming rollovers from IRAs but not SEP-IRAs", but if that's what the plan says.

Thanks -- if I'm in a high tax bracket now (which I am) and 44 years old, then it probably doesn't make sense to convert the SEP to a Roth, since I'll presumably be at a lower tax bracket after retirement...right? I.e., I probably wouldn't gain anything by converting?

DavidAnnArbor

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #4 on: September 30, 2017, 12:55:04 PM »
Another option - if the SEP-IRA is small would be to convert it to a Roth IRA.  Pay the taxes now, paving the way for the future.

Or roll the SEP-IRA to a regular IRA, then roll that into your 401K.  Kind of an arbitrary line to set - "we'll take incoming rollovers from IRAs but not SEP-IRAs", but if that's what the plan says.

Thanks -- if I'm in a high tax bracket now (which I am) and 44 years old, then it probably doesn't make sense to convert the SEP to a Roth, since I'll presumably be at a lower tax bracket after retirement...right? I.e., I probably wouldn't gain anything by converting?

No don't convert, you'll be paying a high marginal tax rate on that, your federal plus your state income taxes. Absolutely not.
The original plan to move the SEP to your IRA to your 401k probably is the most logical sequence.
Then you can do the back door Roth.

greenjb

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #5 on: October 02, 2017, 08:55:48 AM »
Another option - if the SEP-IRA is small would be to convert it to a Roth IRA.  Pay the taxes now, paving the way for the future.

Or roll the SEP-IRA to a regular IRA, then roll that into your 401K.  Kind of an arbitrary line to set - "we'll take incoming rollovers from IRAs but not SEP-IRAs", but if that's what the plan says.

So I can't roll it into my $12.5K traditional IRA because that's the fund I want to backdoor convert to Roth. But here's a thought: is there anything to stop me from opening a second traditional IRA, funding it with, say, $100, the rolling the SEP into THAT IRA, which would presumably could be rolled into my 401(k), allowing me to finally do a Roth conversion on the remaining $12.5K traditional IRA. Does anybody see a flaw in that plan?

dandarc

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #6 on: October 02, 2017, 09:15:22 AM »
You have $12.5K in your traditional IRA already?  You've already made the non-deductible contribution for this year?  Trying to figure out why you wouldn't just use the one IRA - first get everything that needs to go into the 401K, then make a non-deductible contribution, then convert is the usual timeline.

greenjb

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #7 on: October 02, 2017, 12:06:18 PM »
You have $12.5K in your traditional IRA already?  You've already made the non-deductible contribution for this year?  Trying to figure out why you wouldn't just use the one IRA - first get everything that needs to go into the 401K, then make a non-deductible contribution, then convert is the usual timeline.

I have $12.5K in a non-deductible traditional IRA -- this is what I'm hoping to convert to Roth. But my current SEP IRA (also traditional) would be subject to the pro-rata rule and thus is blocking me from converting the $12.5K to Roth. I'd intended to roll the SEP into my 401(k), clearing the way for the Roth conversion -- but my 401(k) plan says they don't accept SEP rollovers. So I'm trying to find a way to: 1) change the SEP into a traditional IRA, in order to roll it into my 401(k), 2) do so without touching the $12.5K that I'd like to convert. Right now, that money is not tax-advantaged, and only will be if I can convert it to Roth. Make sense? The only thing I can think of that might allow me to do this is to start a second, non-deductible IRA with some small sum -- say $100 -- to serve as the vehicle that'll allow me to convert the SEP into a traditional IRA, then roll that one into 401(k) to clear way for Roth conversion.

greenjb

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #8 on: October 02, 2017, 03:06:41 PM »
Ok, I think I've figured out a solution with help from Vanguard: open a new traditional IRA with zero balance; roll SEP into new IRA; my 401(k) will accept traditional IRA rollover; that frees me up to convert other traditional IRA to backdoor Roth. Thanks to all who contributed ideas/feedback.

DavidAnnArbor

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Re: Can I do a Backdoor Roth conversion if I have a SEP IRA?
« Reply #9 on: October 02, 2017, 03:10:42 PM »
Ok, I think I've figured out a solution with help from Vanguard: open a new traditional IRA with zero balance; roll SEP into new IRA; my 401(k) will accept traditional IRA rollover; that frees me up to convert other traditional IRA to backdoor Roth. Thanks to all who contributed ideas/feedback.

Sounds like you got it figured out.