Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

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JustinTime
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Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by JustinTime » Thu Sep 03, 2015 3:43 pm

I just had a great conversation with Fidelity. I'm really thinking it may make sense for me to do a Solo-401K Vs. a SEP for my small sole-proprietor side business.

Note: I also have a employers 401K so there would be no employee contribution benefit for me since that 18K would be maxed out with my employers 401K.

Here's my reasoning:

I have a side business, and I will likely be maxing out the 53K employee/profit sharing (Pre-Tax) each year. I also make to much money to perform a Pre-Tax/Deductible contribution to a traditional IRA. That leaves me the backdoor option for a Roth. So I could contribute after-tax money to a traditional IRA and immediately convert that to a Roth.

Issue this that is say I want to perform a Roth conversion for $ 5,000 based on IRS form 8606: http://www.irs.gov/pub/irs-pdf/f8606.pdf this would take all my IRA's into account and divide the percentage of the conversion to each IRA equally.

Lets say I have 50,000 in the SEP IRA (Pre-Tax) and (5,000) in a Traditional IRA that is (After-Tax) money this would allow me to convert $ 5,000 / $ 55,000 (Amount in all IRA's) which = .09%.

Conversion for the SEP IRA would be = $ 50,000 * .09% = $ 4,550 Roth Conversion (This would be a taxable event since this is Pre-Tax money in my high tax bracket)
Conversion for the Trad IRA would be = $ 5,000 * .09% = $ 450 Roth Conversion (This would not be a taxable event since the money is After-Tax)

By creating a Solo-401K, it could shelter any of the Profit Sharing portion from my business from being calculated in this conversion since it would be in a 401K not an IRA.

I know there can be a little more paperwork like IRS form 5500 if the Solo-401K is more than $ 250,000, but it doesn't seem like anything to significant for a Solo-401K.

Can anyone see any drawbacks to creating a Solo-401K and rolling my SEP IRA into it so that I can only convert my After-Tax Trad IRA into a Roth (Backdoor Roth).

The only thing I can think of is the Fidelity agent said you can only access the 401K funds on specific trigging events whereas with an IRA you always have access before 59 1/2 if you pay the 10% tax and income tax, but I really don't plan on needing this anyway.

Here's the triggering events for the Solo-401K with Fidelity:

Death
Disability
59 1/2
Separate from service (Business sold / closed)

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JustinTime
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by JustinTime » Thu Sep 03, 2015 5:53 pm

Bumping up since it's around the end of the work day.

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Duckie
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by Duckie » Thu Sep 03, 2015 6:03 pm

JustinTime wrote:Can anyone see any drawbacks to creating a Solo-401K and rolling my SEP IRA into it so that I can only convert my After-Tax Trad IRA into a Roth (Backdoor Roth).
I see no drawbacks.

AWH_CPA
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by AWH_CPA » Thu Sep 03, 2015 6:18 pm

Can SEP IRAs be rolled into 401(k) plans?

I think that is your only limitation. If they can, then by all means do it. But it was my understanding that a SEP IRA is not a "qualified" plan that can rolled into another qualified plan. I very well could be wrong on this though.

michelef
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by michelef » Thu Sep 03, 2015 6:23 pm

Regarding rolling a SEP into a solo 401k - different companies have different rules. Vanguard does not allow this, while Fidelity does. My husband transferred his SEP from Vanguard to Fidelity for just this purpose.

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JustinTime
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by JustinTime » Thu Sep 03, 2015 6:28 pm

The Solo-401K would be with Fidelity so yes it could be rolled over into the Solo-401K
AWH_CPA wrote:Can SEP IRAs be rolled into 401(k) plans?

I think that is your only limitation. If they can, then by all means do it. But it was my understanding that a SEP IRA is not a "qualified" plan that can rolled into another qualified plan. I very well could be wrong on this though.

JDDS
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Re: Does It Make Sense to Go From SEP to Solo-401K for BackDoor Roth

Post by JDDS » Thu Sep 03, 2015 9:22 pm

Lots of people have mentioned/encouraged others to do this for the reasons you give.

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