Bogleheads.org

Hello,
Thanks in advance for the help.

Current situation:
-All Funds at Vanguard
-I make too much to contribute to Roth IRA
-Contribute max to Simple IRA each year and plan to next year
-Roth IRA - 120K
-SEP IRA - 400K
-SIMPLE IRA - 12K
-Non-Deductible Trad IRA - 16K
-Near the end of each year I transfer Simple IRA to SEP IRA. This is to take advantage of Admiral Shares.

Strategy to use Back Door Roth:
-Open i401K at Fidelity
-Transfer SIMPLE IRA to SEP IRA at Vanguard
-Roll SEP IRA to Fidelity i401K before the end of year
-Make Non Deductible Trad IRA Contribution
-Transfer All of Trad IRA to Roth IRA (I understand I will have some taxes for the other Non Deducible Trad IRA Contributions from the past two years)

Some addition thoughts:
-Considering transferring Fidelity i401K back to Vanguard. But I am concerned about how it would work if I continue to contribute to my SIMPLE IRA next year at vanguard. Do I do the same process by transferring Simple to SEP, then SEP to Fidelity i401K, lastly, Fidelity i401K to Vanguard i401K.

Questions:
Will this work?
Am I missing something?
Is it worth it?


Research on this was from this post:
viewtopic.php?t=199613

Based on the accounts listed above, I presume you are self-employed without an employer-based 401k.

Why, then, not just roll your current SEP and SIMPLE funds to a Fido i401k use your Fido i401k instead of a SIMPLE IRA going forward? This would result in:
-$55k of tax-deferred space per year ($18.5k employee and $36.5k employer contribution)
-zero IRA balances (aside from backdoor Roth) and thus no pro rata concerns

I _think_ you've got the important bits in mind. You collect up all the pre-tax IRA bits (SEP IRA, SIMPLE IRA, traditional pre-tax IRA, earnings from traditional after-tax IRA contributions) and shift those to the 401k. Then you can shift the remainder (plus any additional after-tax contributions) to Roth.

Note that you don't have to track earnings from your after-tax contributions. I cleaned up my accounts using an employer 401k a few years back, and my approach was to take the total value minus the total value of after-tax contributions, add a safety margin, and transfer that. Then I only had to pay taxes on the safety margin left behind. [I might have converted everything to money-market fund to keep it stable, because I think I paid taxes on like $3 of earnings.]

As someone else said, though, if you're self-employed and can get a solo 401k, why are you using a SEP or SIMPLE in the first place? Probably easier to just go direct to the 401k to keep the backdoor Roth available without a bunch of work.

Per the thread you referenced, I'm not sure what the value of bouncing out to Fidelity and then back to Vanguard is, especially since it sounds like the Vanguard solo 401k maybe sucks a bit. In the past when I've been busily designing a complicated strategy to save some myself some relative money (like getting a lower ER), I've found it to be a good idea to periodically stop and estimate my actual absolute dollar savings per year. If my complicated plan is saving me $35/year, usually I'll just abandon it for a simpler option. Or look for a way I might get most of the savings without most of the work (often by doing the complicated thing less often).

If you continue to contribute to the SIMPLE IRA, you will need to get the balance to ZERO by December 31 each year you do the conversion step for the Backdoor Roth or else you will be paying taxes pro-rata on the backdoor Roth and will end up with basis in the SIMPLE IRA. You may wish to experiment with some practice runs through multiple years of Form 8606 to see how this will work.

You cannot have an active Solo 401k and an active SIMPLE IRA for the same employment. Your plan makes sense up to the point of continuing to use the SIMPLE IRA. Once you've moved all this money, you should just use the Solo 401k (in addition to the back door Roth) after that.