Question on tax deadlines and an IRA rollover to Solo 401(k)

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Question on tax deadlines and an IRA rollover to Solo 401(k)

Postby K-Bogle » Fri Apr 05, 2013 12:27 pm

My wife and I are new to retirement planning and we've not taken advantage of many great opportunities over the past few years. I'm trying to make the best out of 2012 while I still have time.

Wife has:
1) Tax-deferred IRA with Vanguard. The money was rolled into this account in mid-2012 from a former employer's 403(b). It's a mid 5-figure sum.
2) Tax deferred IRA with Capital One bank from many years ago. It's a low 4-figure sum.

Combined we made too much in 2012 to qualify for any tax deferred contributions to IRAs. So I'm trying to get our ducks in a row here to make non-deductible contributions to our IRAs before April 15th with the intent of doing a Roth conversion.

Obviously the issue is with her current IRAs as the Roth conversion doesn't make much sense considering the entirety of her IRAs will need to be converted and tax due. Apparently Fidelity accepts IRA rollovers into a Solo 401(k), and as luck would have it she is only receiving 1099 income at the moment.

Can we:

1) Establish and make the full 2012 $5000 contribution to a new Fidelity tIRA before April 15, 2013 and in the meantime:
2) Create a solo 401(k) for her with Fidelity (I assume this may take a week or two to process)
3) Rollover her old IRAs to her new solo 401(k) (another week+, so now we're well past the April 15th tax deadline)
4) Once the rollover is complete, do the backdoor Roth IRA conversion on her 2012 $5000 contribution to her new tIRA thus saving her tax deferred money from the conversion

This is all assuming Fidelity allows all of this. I think what I'm mostly unsure of is whether or not the $5000 2012 contribution can be converted since it was made before the old IRAs were rolled over into the solo 401(k).

Does anyone have any thoughts on this?

Thanks!
K-Bogle
 
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Re: Question on tax deadlines and an IRA rollover to Solo 40

Postby gtaylor » Fri Apr 05, 2013 12:55 pm

As stated, yes, however:

- You cannot create a solo 401(k) now for plan year 2012, so there will be no way to contribute to the solo 401(k) for 2012.
- You *can* create and contribute $5000 now to a Traditional IRA for 2012, and having it in a new isolated account is handy for rollover basis arithmetic verification purposes.
- You can also contribute $5500 now to the Traditional IRA for 2013.
- Any rollover or conversion exercises you conduct will apply to the 2013 tax year, so the balances of all IRA accounts being zero on Dec 31 2013 is critical.
- The ordering of IRA->401(k) rollovers before the backdoor is critical; the 401(k) does not accept basis ie already-taxed amounts, so this first rollover performs the separation.
- The backdoor IRA->Roth IRA conversion timing after that just has to occur before Dec 31 and before significant earnings occur in the account.

The trick is to avoid accidentally finding yourself with a nonzero IRA balance on Dec 31. Dunno if inherited IRAs count, but other IRA balance-generating events all seem self-induced.
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Re: Question on tax deadlines and an IRA rollover to Solo 40

Postby tfb » Fri Apr 05, 2013 1:04 pm

K-Bogle wrote:This is all assuming Fidelity allows all of this. I think what I'm mostly unsure of is whether or not the $5000 2012 contribution can be converted since it was made before the old IRAs were rolled over into the solo 401(k).

Yes you can do all that, in the exact order you specified. While you are at it, contribute $5,500/6,500 for 2013 and include it in the conversion. It's easier to contribute for and convert in the same year than splitting them into two years (contribute for 2013 in 2014, convert in 2014).
Harry Sit, taking a break from the forums.
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Re: Question on tax deadlines and an IRA rollover to Solo 40

Postby K-Bogle » Fri Apr 05, 2013 1:13 pm

I think I understand everything you are saying.

The intent is not to contribute 2012 pre-tax dollars to the solo 401(k) established this year. The intent of setting up the solo 401(k) is 2-fold: 1) she can contribute new 2013 pre-tax dollars into it and 2) it will shelter her current tax deferred IRA's from the Roth conversion.

So if we:

Right now before tax deadline: Create TIRA and deposit after-tax $10,500 (2012/2013 contribution)
and then start the process of
Create solo 401(k) -> rollover old pre-tax Vanguard/Capital One IRAs into solo 401(k)
which would clear the entire balance of her pre-tax IRAs and then
Backdoor Roth convert the new $10,500 TIRA

I think this leaves us with:

Her new solo 401(k) contains the balance of her old IRAs. The old IRAs are cleared out. She has $10,500 in a Roth IRA. She can make new 2013 pre-tax contributions (up to the limit available) to her new solo 401(k).

Does it seem I have this right? Thanks in advance, I appreciate the help.
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Re: Question on tax deadlines and an IRA rollover to Solo 40

Postby K-Bogle » Fri Apr 05, 2013 1:14 pm

tfb wrote:
K-Bogle wrote:This is all assuming Fidelity allows all of this. I think what I'm mostly unsure of is whether or not the $5000 2012 contribution can be converted since it was made before the old IRAs were rolled over into the solo 401(k).

Yes you can do all that, in the exact order you specified. While you are at it, contribute $5,500/6,500 for 2013 and include it in the conversion. It's easier to contribute for and convert in the same year than splitting them into two years (contribute for 2013 in 2014, convert in 2014).


Thank you, yes that is the plan. Appreciate the help!
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