Backdoor Roth

Technical topics regarding tax preparation.
#1
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I get nervous advising on these things, as there are so many things that can come back to bite you. Would love if someone can see if I am missing anything obvious here. High income couple has husband as an employee covered by 401(k); wife is self-employed with past SEP IRA balance. This is only IRA they have. Want to start contributing to backdoor Roth in 2019, and transfer SEP balance to a 401(k) in 2020.

My thinking is that they can both contribute to a non-deductible IRA for 2019; however, the entire SEP IRA balance should be transferred to a 401(k) before 12-31-19. This way only the earnings on the non-deductible IRA will be taxed when converted to Roth. If the SEP is not transferred to 401(k) before 12-31-19, then the SEP balance will be included in the calculation for what is taxable. Is my thinking correct?
 

#2
JAD  
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I understand the law as you explained it. I also get nervous with this transaction. I would be more comfortable with the conversion of the nondeductible IRA to a Roth in 2020, with the SEP transferred to the 401(k) in 2019, although as I understand the law, that extra precaution is not required.
 

#3
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Thanks JAD for the reply. Yes, they were actually planning to contribute to the nondeductible IRA in 2020, and then convert shortly thereafter. I, too, feel better about doing it like that!
 

#4
Neill  
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As written you don't say the wife has a 401k but the husband does since you mention that.
I didn't think you could transfer from a spouses IRA to the other spouses 401k. Is there some magic option I am unaware of here?
 

#5
MWEA  
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It wasn’t stated, but I’m assuming the spouse is still self employed and now has a 401(k) plan set up that she can transfer into. Otherwise, as you stated, that creates an issue.
 

#6
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Sorry I wasn't clear. The Spouse wants to discontinue the SEP and open a 401k so that they can begin contributing to a backdoor ROTH.
 

#7
makbo  
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Seaside CPA wrote:My thinking is that they can both contribute to a non-deductible IRA for 2019; however, the entire SEP IRA balance should be transferred to a 401(k) before 12-31-19. This way only the earnings on the non-deductible IRA will be taxed when converted to Roth. If the SEP is not transferred to 401(k) before 12-31-19, then the SEP balance will be included in the calculation for what is taxable. Is my thinking correct?

Not exactly. Taxpayers with AGI that is too high are prohibited from contributing directly to a Roth. The "backdoor Roth" is a legal way for that taxpayer to put new money into a Roth despite the AGI-related prohibition. Whether or not the conversion from traditional IRA to Roth IRA is fully or partly taxable is a separate issue that has always existed since Roths came into existence, before there was ever any AGI-related restriction. Since all the money that goes into the Roth must be after-tax money, it hardly makes any difference at what point it is taxed before being contributed/converted.
 

#8
Doug M  
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It's not too late to convert the SEP this year. Have taxpayer start the 401k this year, roll the SEP into the 401k in 2019. Whatever contribution should would put into the SEP, she puts into the 401k. Done correctly, you will have higher income for the 199A deduction.

You can always elect the IRA contribution to be non-deductible.
 


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