Changing mistaken Roth-IRA contribution to SEP-IRA?

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Topic Author
marinaplace
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Joined: Sun Sep 04, 2016 6:01 pm

Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Sat Jan 05, 2019 8:36 pm

Hi all.

I made a mistake and could use some guidance. I’m 55 years old, still working both a full-time wage job (where I max out my 403b) and a side (sole proprietor) private practice. During 2018, I put $6500 in my Roth-Ira (this is not through my wage employer but my own setup). Recently, doing an early pass at my taxes in Turbo Tax, I was informed that my income has now risen definitely above the contribution limit and I would be penalized for the Roth contribution.

I have a pre-existing Roth account, and also a pre-existing SEP-IRA (with about 20k in the SEP-IRA). All the contributions in any previous years to the SEP-IRA were deductible.

Both the Roth-IRA and the SEP-IRA are at Vanguard.


I had already planned to contribute $3k to my SEP-IRA for the 2018 tax year, though haven’t contributed it yet.

Meanwhile, according to my calculations, I can contribute a maximum of $11k to the SEP-IRA in 2018.

I read the Backdoor Roth: A Complete How-to by forum member tfb and it looks like doing a Backdoor Roth would be challenging and likely unwise because of the pre-existing SEP-IRA contributions.

My questions are:

1. Is it possible that I could just ask Vanguard to recharacterize the Roth-IRA contributions from 2018 as SEP-IRA contributions, and ultimately make a total SEP-IRA contribution of $9500 for 2018? Is this the right wording to use (recharacterize vs. convert)?

2.Am I correct in my thinking that this is a better way to go vs. making the $6500 a backdoor Roth contribution?

3. Is there anything else I'd need to do to make this work? Special forms to fill out?

4. And I’m assuming I could then claim all $9500 of SEP-IRA contribution as a deduction on my 2018 taxes, correct?


Many thanks for your help.

krow36
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by krow36 » Sat Jan 05, 2019 9:10 pm

marinaplace wrote:
Sat Jan 05, 2019 8:36 pm
Hi all.

I made a mistake and could use some guidance. I’m 55 years old, still working both a full-time wage job (where I max out my 403b) and a side (sole proprietor) private practice. During 2018, I put $6500 in my Roth-Ira (this is not through my wage employer but my own setup). Recently, doing an early pass at my taxes in Turbo Tax, I was informed that my income has now risen definitely above the contribution limit and I would be penalized for the Roth contribution.

I have a pre-existing Roth account, and also a pre-existing SEP-IRA (with about 20k in the SEP-IRA). All the contributions in any previous years to the SEP-IRA were deductible.

Both the Roth-IRA and the SEP-IRA are at Vanguard.


I had already planned to contribute $3k to my SEP-IRA for the 2018 tax year, though haven’t contributed it yet.

Meanwhile, according to my calculations, I can contribute a maximum of $11k to the SEP-IRA in 2018.

I read the Backdoor Roth: A Complete How-to by forum member tfb and it looks like doing a Backdoor Roth would be challenging and likely unwise because of the pre-existing SEP-IRA contributions.

My questions are:

1. Is it possible that I could just ask Vanguard to recharacterize the Roth-IRA contributions from 2018 as SEP-IRA contributions, and ultimately make a total SEP-IRA contribution of $9500 for 2018? Is this the right wording to use (recharacterize vs. convert)? I think you should recharacterize the Roth IRA to a traditional IRA which will have to remain a non-deductible tIRA until you are able to take care of the Sep IRA before Dec 31, 2019. You should contribute to your SEP for 2018 but for 2019 you should establish a solo 401k. Vanguard's solo 401k does not accept rollover IRAs so you should use Fidelity or Schwab.
2.Am I correct in my thinking that this is a better way to go vs. making the $6500 a backdoor Roth contribution?

3. Is there anything else I'd need to do to make this work? Special forms to fill out? Yes, a Form 8606.

4. And I’m assuming I could then claim all $9500 of SEP-IRA contribution as a deduction on my 2018 taxes, correct?


Many thanks for your help.

aristotelian
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by aristotelian » Sat Jan 05, 2019 9:32 pm

I agree with the above, to do a Solo 401k and roll the SEP into the Solo 401k to enable future backdoor Roth. In the meantime, recharacterize the Roth to Traditional (no deduction), and keep it in cash so that there will be few earnings to be taxed. You will then convert the Traditional to Roth in 2020 (along with your 2020 backdoor Roth contribution).

Compatibility with backdoor Roth is one of the primary advantages of Solo 401k. I don't know why SEP even exists, much less why it is ever recommended, since it has no advantages over Solo 401k and only disadvantages.

If you do not wish to go down the Solo 401k/backdoor Roth option, the simplest option would be to simply withdraw the overcontribution.

One last possibility, if you do not expect to have this problem in the future, you could leave the funds in the Roth, pay a one time excise tax of 6% on the overcontribution, and then undercontibute next year. This only works if you are under the Roth limit next year.

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Earl Lemongrab
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Earl Lemongrab » Sun Jan 06, 2019 3:46 pm

aristotelian wrote:
Sat Jan 05, 2019 9:32 pm
In the meantime, recharacterize the Roth to Traditional (no deduction), and keep it in cash so that there will be few earnings to be taxed.
That doesn't make any sense. Avoid earnings so you reduce your taxes? If I offered you $1000 with the provision that you would have to pay income tax, would you turn it down?

aristotelian
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by aristotelian » Sun Jan 06, 2019 4:08 pm

Earl Lemongrab wrote:
Sun Jan 06, 2019 3:46 pm
aristotelian wrote:
Sat Jan 05, 2019 9:32 pm
In the meantime, recharacterize the Roth to Traditional (no deduction), and keep it in cash so that there will be few earnings to be taxed.
That doesn't make any sense. Avoid earnings so you reduce your taxes? If I offered you $1000 with the provision that you would have to pay income tax, would you turn it down?
Good point, although you could go aggressive somewhere else in your portfolio to compensate and get the same return without having to pay tax at your marginal rate on the gains.

Alan S.
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Alan S. » Sun Jan 06, 2019 4:30 pm

In any event, it is not possible to recharacterize a non SEP contribution as a SEP contribution or vice versa. SEP contributions are employer contributions and TIRA or Roth IRA contributions are personal contributions which is why this type of recharacterization is not allowed.

Of course, you can still recharaterize your Roth contribution as a non deductible TIRA contribution and file Form 8606 for 2018. Or if you have lost money on your Roth contribution, rather than recharacterizing it you can ask to have it returned net of losses and then recontribute the full 6500 as a 2018 non deductible TIRA contribution prior to 4/15.

An additional factor here is how liquid you are to make a max SEP contribution for 2018 in addition to the 6500 non SEP contribution. If you do not have the liquidity for both and prefer the SEP deduction, just have the Roth contribution returned and use that money to max out your deductible SEP contribution.

From there you could change over to a solo K plan for 2019 with a provider that accepts rollovers from your SEP IRA of pre tax dollars in any TIRAs you have.

Spirit Rider
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Spirit Rider » Sun Jan 06, 2019 5:07 pm

To add to Alan's points.

You have until 10/15 to make the SEP IRA contributions if you file an extension. This is true even if you file your return on time. This can allow you to actually get any tax refund and use it as part of the contributions.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Sun Jan 06, 2019 6:43 pm

Wow—this is very helpful….and a lot to take in.

I do not have the liquidity to make a max SEP contribution for 2018 in addition to the $6500 non-SEP contribution. I’m not sure if my contribution lost money, but if I’m reading the Vanguard screen right it looks like it lost $51 over the year. (Sorry, I’m having difficulty deciphering the screen.)

Given that, if I’ve understood you all correctly, it sounds like my current options are as follows (in no particular order):

#1—Recharacterize my Roth contribution as a non-deductible TIRA contribution and file Form 8606

Or

#2—If I have lost money on the Roth contribution, ask to have it returned net of losses and then recontribute $6500 as a non-deductible TIRA contribution for 2018.

OR

#3—Have the Roth contribution returned and use it to max out my SEP 2018 contribution for tax year 2018.


Whichever one of these I pick, then the next steps would be:

—During the 2019 calendar year, create a Solo 401k at Fidelity or Schwab to enable future backdoor Roth contributions

—Also during 2019(?), rollover my entire SEP-IRA to this Solo 401k

—in 2020, convert the TIRA (if I did create one, per #1 or #2) above, to a Roth (still at Vanguard, where my other Roth is, I’m assuming). I'd have to pay taxes on any earnings during the time the contribution was in the TIRA.

—Also in 2020, make another Roth backdoor contribution (will they take both of these in the same year?)

Follow-up questions:

1. Do I have this right?
2. Which option would be easiest/smoothest?
3. Why, if the contribution lost money, is it better to have it returned to me vs. recharacterizing it?
4. Given that I am 55 years old, but expect to be working until age 70, is there a decidedly better advantage to going SEP-IRA for that $6500 vs. TIRA that gets eventually converted into Roth?
5. What would I do, if anything for 2019 tax year contributions? I'm assuming biz $ would go to the new Solo 401k; what about money that normally (in past years) I would've been contributing to a Roth? Am I forgoing a 2019 backdoor Roth contribution?
6. Anything else I’m should be thinking of with all this?

Thanks again!

aristotelian
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by aristotelian » Sun Jan 06, 2019 10:44 pm

Sounds correct, and given that getting the money back would allow you to contribute more to your SEP, I would do #3. Always maximize your pretax if you can.

When you set up your solo 401k, make sure they allow incoming rollovers. I believe Vanguard does not.

I am not following your last question. Moving forward, I would max the Solo 401k and then backdoor Roth in that order. The reason being that you are in a high tax bracket, meaning you have a big guaranteed premium by saving pretax, although a couple of years of retirement before 70 would be ideal from a tax standpoint.

Topic Author
marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Mon Jan 07, 2019 7:37 pm

Ok, given this, looks like I just request the Roth money back from Vanguard and then contribute it to my SEP for 2018. Since both my Roth and SEP are at Vanguard, do they actually have to send me the $ back and then I have to resend it to them. Or can they just move it over?

I'm new to the world of solo 401k's, so I apologize for the following noob questions: if I'm already planning on maxing out my contribution (19k + 6k catch up in 2019) at my wage job to the organization's 403b, what impact would that have in terms of also contributing to a solo 401k? If I'm reading things correctly in an article, it means I would've maxed out my total elective contributions as an employee, but as the employer in my sole proprietorship I could still contribute 25% of "my pay". But I don't get "paid" a wage from my sole proprietorship, it's just my net business income....is that still the figure used as the base for the 25% calculations? And would I be mandated to pay the full 25%, or could I contribute any amount up to the 25%?

As pertains to my previous last question about 2019, it looked like folks were suggesting I could make backdoor Roth contributions in 2020, but didn't say anything about backdoor Roth contributions in 2019, so I was wondering about that. However, that question may now be moot, because after maxing out the solo 401k (not to mention the 403b I may not have enough in future years to also do a Roth contribution.

krow36
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by krow36 » Mon Jan 07, 2019 8:20 pm

marinaplace wrote:
Mon Jan 07, 2019 7:37 pm
Ok, given this, looks like I just request the Roth money back from Vanguard and then contribute it to my SEP for 2018. Since both my Roth and SEP are at Vanguard, do they actually have to send me the $ back and then I have to resend it to them. Or can they just move it over?
Call up Vanguard and ask them.


I'm new to the world of solo 401k's, so I apologize for the following noob questions: if I'm already planning on maxing out my contribution (19k + 6k catch up in 2019) at my wage job to the organization's 403b, what impact would that have in terms of also contributing to a solo 401k? If I'm reading things correctly in an article, it means I would've maxed out my total elective contributions as an employee, but as the employer in my sole proprietorship I could still contribute 25% of "my pay". But I don't get "paid" a wage from my sole proprietorship, it's just my net business income....is that still the figure used as the base for the 25% calculations? And would I be mandated to pay the full 25%, or could I contribute any amount up to the 25%?
The employer contribution for the solo 401k is the same as the employer contribution to the SEP IRA. It's 20% of self-employment earnings (business profit - 1/2 SE tax), figured the same way in either.

As pertains to my previous last question about 2019, it looked like folks were suggesting I could make backdoor Roth contributions in 2020, but didn't say anything about backdoor Roth contributions in 2019, so I was wondering about that. However, that question may now be moot, because after maxing out the solo 401k (not to mention the 403b I may not have enough in future years to also do a Roth contribution.
After you've established the solo 401k and moved your SEP IRA into it sometime in the next few months, you'll be able to convert the 2018 non-deductible tIRA to a Roth. You'll also be able to make the 2019 tIRA contribution and convert it quickly (the usual backdoor Roth process). Don't forget the Form 8606! :

Using a solo 401k instead of your SEP IRA won't change your contributions, because your maxing your 403b with the employee contributions. You won't be able to make employee contributions to the solo 401k. The solo 401k allows you to do the backdoor Roth process, but it doesn't allow you to contribute any more.

Spirit Rider
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Spirit Rider » Mon Jan 07, 2019 8:27 pm

marinaplace wrote:
Mon Jan 07, 2019 7:37 pm
but as the employer in my sole proprietorship I could still contribute 25% of "my pay". But I don't get "paid" a wage from my sole proprietorship, it's just my net business income....is that still the figure used as the base for the 25% calculations? And would I be mandated to pay the full 25%, or could I contribute any amount up to the 25%?
The maximum employer contribution is 25% of compensation. However, a self-employed individual's earned income is their net self-employment earnings (business profit - 1/2 SE tax) and their compensation is earned income - the employer contribution itself. Therefore, self-employed individuals calculate their maximum employer contributions as 20% of their net self-employment earnings. You can contribute anywhere from $0 up to the maximum contribution.
As pertains to my previous last question about 2019, it looked like folks were suggesting I could make backdoor Roth contributions in 2020, but didn't say anything about backdoor Roth contributions in 2019, so I was wondering about that. However, that question may now be moot, because after maxing out the solo 401k (not to mention the 403b I may not have enough in future years to also do a Roth contribution.
You can do a Backdoor Roth in any year you have little to no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. After that will be true on 12/31/2019, you can do a Backdoor Roth at anytime.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Wed Jan 09, 2019 2:02 am

Thanks for all this great information. Given that the employer contribution for the solo 401k is the same as the employer contribution to the SEP IRA, it seems the main advantages for me to roll the SEP into a Solo 401k would be:

1. That if I ever leave my wage job, I could potentially contribute more to the solo 401k than the SEP-IRA;

2. That I could choose to perhaps NOT max out my workplace 403b employee contributions, if I liked some investments available where I had my solo 401k, and wanted to shift some of that pre-tax money there;

3. And most importantly, that with the solo 401k I could also do future backdoor Roths.

—Are there any downsides for me to the solo 401k vs. SEP-IRA? Lots of paperwork? Additional big fees that I wouldn’t have to pay vs. SEP-IRA?

—Will there be any taxes or penalties when rolling over the sep-Ira to the solo 401k (not on the initial Roth withdrawal, but on the subsequent SEP to Solo 401k rollover?

And as far as the initial step goes—withdrawing the excess contribution from the Roth IRA and redepositing it in my SEP for 2018:

—Are there additional Tax forms to fill out for my 2018 taxes?

—Would I take out $6500 or ($6500 - losses), or what?

—If there are any earnings on the funds, do they get taken out as well?

—Would Vanguard know the amount of the earnings?

—Do I report them as income and pay tax on them, or do I not since I will be redepositing these immediately back into my SEP-IRA account? Would I owe a 10% penalty on the earnings, since I’m younger than 59 1/2?

—Alternatively, what if there’s a loss, do I report/claim that loss on my 2018 tax forms somehow?

--I'm assuming Turbo Tax Self Employed version, which I use, includes the ability to prep the forms or line items on all this--is that right?


My mind is spinning a bit. It seems like every bit that I learn, there may be something else key that I may be missing. For example, I just learned there are something called mega backdoor Roth contributions, but perhaps only some solo 401k providers/setups might work for this—and I’m not even sure this is something I should be worried about!

I’m thinking it might not be a bad idea, for this and other reasons, to consult with a tax advisor/CPA knowledgeable about retirement and these sorts of strategies, best solo 401k provider for my situation, etc. Any suggestions how I would go about finding someone good who is qualified for this sort of thing? Do those folks have a particular license or title?

Spirit Rider
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Spirit Rider » Wed Jan 09, 2019 12:33 pm

  1. With a one-participant 401k plan, you can make employee elective contributions up to 100% of your net self-employment earnings. For 2019 the limit is $19K + $6K catch-up >= age 50. You can then make the same 20% employer contribution as with a SEP IRA subject to the annual addition limit (employee + employer contributions). This is 100% of compensation and for 2019 $56K. Note: Just like with the SEP IRA, the one-participant 401k annual additions must be aggregated with the 403b annual additions.
  2. It could be an advantage to contribute anything above what is needed to get 403b full matching contributions to a lower cost one-participant 401k plan.
  3. You might be allowed to roll any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts into your 403b. The next bullet is a reason why you might want to do this instead of a one-participant 401k plan.
  • A one-participant 401k plan does require the completion of paper forms, but they are not difficult or long. There is the requirement to file Form 5500-EZ for any year the one-participant 401k plan balance is > $250K. Most mainstream one-participant 401k plan providers do not charge any fees. Vanguard charges a$20/fund annual fee if your total assets are < $50K, but this is moot because Vanguard's Individual 401k plan does not accept rollovers.
  • The SEP IRA -> 401k rollover amount will be reported on Form 1040 Line 4a, but the Line 4b taxable amount will be $0.
  • Any earnings on the 2018 returned Roth IRA contributions are taxable.
  • No additional tax forms that I can think of. You should do this with tax software to be sure.
  • It is Vanguard's responsibility to calculate the earnings on the $6500 contribution. IRA account holders request this many thousands of times a year. They will calculate the + or - earnings. They will return the net amount.
  • The return of Roth IRA contributions are not subject to taxation or the early withdrawal penalty. Return of Roth IRA earnings are subject to taxation, but not the early withdrawal penalty.
  • Losses are not deductible.
  • If you do your part, TurboTax will handle all this just fine.
  • It is not a bad idea to consult with professionals. Just be aware it is not uncommon for even professionals to mess this up or give you incorrect information. This is especially true when it comes to employer retirement plans for small business owners.

Topic Author
marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Wed Jan 09, 2019 1:48 pm

I've got an update and what seems like some great news:

I called Vanguard and talked to a rep in their IRA (or possibly even more specifically excess contributions) dept. She was quite knowledgeable and professional. Here's what she told me:

—Yes, I can simply recharacterize the $6500 Roth contribution as a SEP-IRA contribution

—It is something we can do over the phone. I just need to do it during market hours

—My Roth contribution for 2018 showed a loss of about $345.

—There will be no taxes or penalties involved

—The $6500 - losses would be transferred over to the SEP

—Vanguard will generate a 1099-R and a 5498 (that I believe I can upload into TurboTax)

—I can also make an employer contribution on top of that $6500 if I want to (of course, based on the usual rules for employer contributions to SEP-IRAs.


I specifically asked her about Alan’s comments, below, to double-check:

“In any event, it is not possible to recharacterize a non SEP contribution as a SEP contribution or vice versa. SEP contributions are employer contributions and TIRA or Roth IRA contributions are personal contributions which is why this type of recharacterization is not allowed.”

She assured me that this recharacterization was possible, was not affected by the fact that I had maxed out my 403b at work, and that possibly the comments were because some institutions do not allow “individual”, only “employer” contributions to SEP-IRAs. She said, however, that Vanguard accepts both (and in fact on their webpage I see where contributions can be designated one way or the other).

So I think this is what I will be doing, unless I get howls of protest from this forum that show this rep was completely out of her mind! She said she handles several excess contributions/day and felt very confident about what she was saying. Any howls? Or did I just luck out?

If this is all as good as it sounds, it does raise a question about the future—which is, given’s Vanguard’s policy of allowing the is there any real point to opening up a solo 401k over this SEP that seems to allow individual as well as employer contributions?

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Earl Lemongrab
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Earl Lemongrab » Wed Jan 09, 2019 2:25 pm

As far as I know, the only SEPs that can accept employee contributions are old SARSEPs. It's unlikely you have one of those. I would be quite concerned at this point.

https://www.irs.gov/retirement-plans/re ... ng-sarseps

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Earl Lemongrab
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Earl Lemongrab » Wed Jan 09, 2019 2:30 pm

Here's more on SEPs. Note that the law controls who can contribute, not the custodian.
Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

Available to any size business
Easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document
If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)
No filing requirement for the employer
Only the employer contributes
To traditional IRAs (SEP-IRAs) set up for each eligible employee
Employee is always 100% vested in (or, has ownership of) all SEP-IRA mon
https://www.irs.gov/retirement-plans/ch ... t-plan-sep

krow36
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by krow36 » Wed Jan 09, 2019 3:12 pm

The IRS allows the employee to put their 6k traditional IRA contribution in their SEP IRA account.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
https://www.irs.gov/retirement-plans/re ... tributions

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Earl Lemongrab
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Earl Lemongrab » Wed Jan 09, 2019 3:35 pm

krow36 wrote:
Wed Jan 09, 2019 3:12 pm
The IRS allows the employee to put their 6k traditional IRA contribution in their SEP IRA account.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
https://www.irs.gov/retirement-plans/re ... tributions
That's just combining a SEP and TIRA. It's not making employee contributions to a SEP. The OP could just recharacterize the Roth contribtion to a TIRA directly.

krow36
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by krow36 » Wed Jan 09, 2019 4:03 pm

marinaplace wrote:
Wed Jan 09, 2019 1:48 pm
I specifically asked her about Alan’s comments, below, to double-check:

“In any event, it is not possible to recharacterize a non SEP contribution as a SEP contribution or vice versa. SEP contributions are employer contributions and TIRA or Roth IRA contributions are personal contributions which is why this type of recharacterization is not allowed.”

She assured me that this recharacterization was possible, was not affected by the fact that I had maxed out my 403b at work, and that possibly the comments were because some institutions do not allow “individual”, only “employer” contributions to SEP-IRAs. She said, however, that Vanguard accepts both (and in fact on their webpage I see where contributions can be designated one way or the other).

So I think this is what I will be doing, unless I get howls of protest from this forum that show this rep was completely out of her mind! She said she handles several excess contributions/day and felt very confident about what she was saying. Any howls? Or did I just luck out?

If this is all as good as it sounds, it does raise a question about the future—which is, given’s Vanguard’s policy of allowing the is there any real point to opening up a solo 401k over this SEP that seems to allow individual as well as employer contributions?
The OP wants to recharacterize a Roth IRA contribution to a SEP IRA contribution. So Vanguard is correct, this is possible. Vanguard's online account statement indicates possible employer and employee contributions to a SEP IRA.

The problem for the OP is that this contribution will not be tax-deductible. He's over the income limit to make a direct Roth IRA contribution, so he's over the limit to deduct a traditional IRA contribution.

OP, the solo 401k that has been recommended should not be a Vanguard. Solo 401k plans at Fidelity and Schwab do accept IRA rollovers.

EDIT: I wonder if Vanguard realized that the recharacterized Roth IRA would be a non-deductible SEP IRA? If they had, would they still allow the recharacterization?

OP, I think you should pursue the other options that Alan S. suggested.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Wed Jan 09, 2019 6:19 pm

Ok, it sounds like the consensus is that if Vanguard recharacterizes the Roth money as an "individual" contribution to the SEP, that amount would be non-deductible (due to my income level) and in essence like a TIRA contribution. Since I don't have the liquidity to make a non-deductible contribution like that along with maxing out my SEP-IRA, I guess then what I'll do is have Vanguard withdraw the money and send it to me, and then I will take that $, along with some additional funds, and deposit them all as part of my employer contribution to my SEP.

Still leaves me with a few questions.....

--if I do this, given that the Roth contribution had a loss, would them sending me the remaining money trigger any taxes and/or penalty?

--Do I need to mention anything on my taxes about having done an excess contribution to the Roth, or is that simply a wash and I just claim the amount I contribute to the SEP?

Thanks again--your collective wisdom is helping a lot!

Spirit Rider
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Spirit Rider » Wed Jan 09, 2019 11:05 pm

Alan S. was 100% correct. You can not recharacterize any IRA (traditional or Roth) contribution as a SEP IRA contribution.

As alluded to, what Vanguard was describing was recharacterizing a Roth IRA contribution to a traditional IRA contribution inside a SEP IRA account.

These are two very different things.

The reason you were getting confused over the employee/employer terminology. An employer can only make employer contributions to a SEP IRA, but an employee themselves can make traditional IRA contributions to a SEP IRA.

Since there are no earnings on the returned Roth IRA contributions. There is no tax filing required. Generally, you only need to include an explanation for recharacterizations.

The SEP IRA contribution will just be reported as normal.

krow36
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by krow36 » Wed Jan 09, 2019 11:12 pm

marinaplace wrote:
Wed Jan 09, 2019 6:19 pm
--if I do this, given that the Roth contribution had a loss, would them sending me the remaining money trigger any taxes and/or penalty?

--Do I need to mention anything on my taxes about having done an excess contribution to the Roth, or is that simply a wash and I just claim the amount I contribute to the SEP?
I think Spirit Rider answered your questions in his post above. (No, and yes?). I don't think Vanguard has reported your Roth IRA contribution to the IRS yet, so if it has a loss, and the contribution doesn't exist any more, there's nothing to report. They would have reported a taxable gain.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Thu Jan 10, 2019 1:21 am

Okay, that's great. As far as tax reporting, it seemed that according to the 1040 instructions (for 2017, not sure how things are for 2018 since I know things are completely reworked) that the distribution might still need to be listed in Line 15a on the 1040. Here's the language (italics and underline added):

"Except as provided next, leave line 15a blank and enter the total distribution (from Form 1099-R, box 1) on line 15b.

.....Exception 2. If any of the following apply, enter the total distribution on line 15a and see Form 8606 and its instructions to figure the amount to enter on line 15b....

....4. You had a 2016 or 2017 IRA contribution returned to you, with the related earnings or less any loss, by the due date (including extensions) of your tax return for that year."

Obviously this was for 2017, not 2018, so I'm extrapolating. But perhaps that's because by IRA in this language, they might mean only a TIRA , not a Roth. And I now know that I wouldn't need to list anything on Line 15b for taxable amount so there were no earnings.

I saw on the Turbo Tax help site there was some question about a similar situation in a previous year (excess Roth contribution returned - losses before the tax filling deadline) and it seemed like there was something about generating a 1099-R form to send in with your taxes so you wouldn't need to later amend your taxes when the actual 1099-R form finally arrived in the following year from the institution. All this does get confusing for me.

Again, thanks to everyone. Your forbearance with the questions from this noob most appreciated.

Katietsu
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Katietsu » Thu Jan 10, 2019 1:40 am

I would slow down a bit. You are trying to absorb too much at once. For now, request a return of your 2018 Roth IRA contribution with associated earnings/losses. Then make your SEP IRA contribution.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Fri Jan 11, 2019 5:43 pm

Thanks. I think one step at a time is a good idea. Vanguard is withdrawing the excess contribution and I'll be making the SEP contribution. The questions will remain, since I'm already hearing, for example, a difference between what Vanguard told me what they will be putting in Box 1 and Box 7 of the 1099-R form and what the Turbo Tax folks are instructing me to put in those boxes in its software.....but for the next week, it'll be enough just to get the money withdrawn and recontributed.

Thanks again to all.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Tue Jan 29, 2019 2:35 pm

Update:
I have withdrawn the $6500 Roth contribution from Vanguard. It was removed as an excess contribution and put in my bank account. I then re-contributed it as part of a larger SEP-IRA contribution. So that part's set.

Vanguard told me they would be issuing me a 1099-R next January (2020) and that the codes listed in Box 7 would be P,J. In Box 1, they would be listing the amount of the contribution returned to me (roughly $6200, since there was a $300 loss on the investment). They also said they'd be issuing me a form 5498 in May just for my records.

I spoke with a tax pro yesterday and he believed that I should call Vanguard and try to convince them NOT to issue me a 1099-R, since the excess contribution was completely withdrawn before the 2018 filing deadline. He was concerned that otherwise the IRS might feel that I should get a penalty since the 1099-R will list an early distribution. He felt that if Vanguard says no, I should attach a statement to my taxes. On the other hand, he was not too clear about several other topics--for example, he had never heard of a backdoor Roth, wasn't up on the differences between a SEP-IRA and a Solo 401k, etc.

I'm ready to gear up and try and convince Vanguard to not issue the 1099-R, but I'm not sure how successful that will be. If I am not, I'm wondering how to list things on either this year's or next year's taxes so I won't be seen as being liable for penalties. Thanks.

mark1623
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by mark1623 » Tue Jan 29, 2019 3:34 pm

marinaplace wrote:
Tue Jan 29, 2019 2:35 pm
Update:
I have withdrawn the $6500 Roth contribution from Vanguard. It was removed as an excess contribution and put in my bank account. I then re-contributed it as part of a larger SEP-IRA contribution. So that part's set.

Vanguard told me they would be issuing me a 1099-R next January (2020) and that the codes listed in Box 7 would be P,J. In Box 1, they would be listing the amount of the contribution returned to me (roughly $6200, since there was a $300 loss on the investment). They also said they'd be issuing me a form 5498 in May just for my records.

I spoke with a tax pro yesterday and he believed that I should call Vanguard and try to convince them NOT to issue me a 1099-R, since the excess contribution was completely withdrawn before the 2018 filing deadline. He was concerned that otherwise the IRS might feel that I should get a penalty since the 1099-R will list an early distribution. He felt that if Vanguard says no, I should attach a statement to my taxes. On the other hand, he was not too clear about several other topics--for example, he had never heard of a backdoor Roth, wasn't up on the differences between a SEP-IRA and a Solo 401k, etc.

I'm ready to gear up and try and convince Vanguard to not issue the 1099-R, but I'm not sure how successful that will be. If I am not, I'm wondering how to list things on either this year's or next year's taxes so I won't be seen as being liable for penalties. Thanks.
You won't be successful because the "tax pro" is wrong. When money leaves an IRA, the IRA custodian issues a 1099-R. You'll report this on your taxes as an excess removal and all will be fine.

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celia
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by celia » Tue Jan 29, 2019 4:15 pm

marinaplace wrote:
Wed Jan 09, 2019 1:48 pm
... is there any real point to opening up a solo 401k over this SEP that seems to allow individual as well as employer contributions?
When you do a Backdoor Roth, the pro rata rule will apply if there is any balance in a SEP-IRA, SIMPLE IRA, or traditional IRA. The 401K does not interfere with the Backdoor Roth, however.
marinaplace wrote:
Tue Jan 29, 2019 2:35 pm
I have withdrawn the $6500 Roth contribution from Vanguard. It was removed as an excess contribution and put in my bank account. I then re-contributed it as part of a larger SEP-IRA contribution. So that part's set.
Please don’t think of this as a re-contribution. It will confuse your thought process. You made an EXCESS CONTRIBUTION, then WITHDREW it. You are DONE with the Roth IRA.

Later on you CONTRIBUTED to your SEP-IRA. This was a separate transaction you could have done regardless if you had contributed and withdrew from the Roth or not. It has nothing to do with what happened earlier.
marinaplace wrote: I'm ready to gear up and try and convince Vanguard to not issue the 1099-R, but I'm not sure how successful that will be. If I am not, I'm wondering how to list things on either this year's or next year's taxes so I won't be seen as being liable for penalties. Thanks.
There aren’t any penalties for withdrawing an excess contribution in a timely manner (ithat is, October 15 of the year following the year the contribution was applied to). In fact, there ARE PENALTIES for NOT withdrawing it in a timely manner.


If the contribution to the SEP-IRA was meant to be non-deductible, you now need to decide what to do with the SEP-IRA. Rollovers to 401Ks are not allowed to accept the non-deductible contributions.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Wed Jan 30, 2019 12:12 pm

Okay, thanks. This jives with what I had been thinking....that it must be standard for Vanguard (or whomever) to issue the 1099-R. And the SEP-IRA contribution is deductible since it is below the contribution limit I am allowed this year based on my business net income.

I'm still a little confused about specifically where I list the information on next year's tax form (once I receive the 1099-R) and how the IRS knows that it was withdrawn in a timely manner. That information is not, I believe, on the 1099-R. The codes they will use are P,J. Code P will mean it was an excess contribution for 2018 withdrawn in 2019; Code J says it was an early distribution for a Roth. Does the IRS just assume it was timely unless I state otherwise?

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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by Alan S. » Wed Jan 30, 2019 3:38 pm

Yes, the IRS will assume it is timely because the custodian would not issue a P code unless the excess was returned by the extended due date of 10/15/2018 for a 2017 contribution. After the due date there would be no P code and you would have incurred a 6% excise tax for 2017, and possibly for 2018.

If there had been any earnings returned, they would have been taxable in the tax year you made the contribution, but if no earnings there is nothing to be taxed. Technically, the "P" in Box 7 means that any earnings would have been taxable in 2017, so if there were no earnings it saves you the hassle of amending your 2017 return to report the earnings income.

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marinaplace
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Re: Changing mistaken Roth-IRA contribution to SEP-IRA?

Post by marinaplace » Thu Jan 31, 2019 6:05 pm

Alan, this is incredibly clear and helpful and puts my mind at ease--thanks very much. I assume where you wrote 2017 and 2018, you mean 2018 and 2019, yes?

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