SEP IRA convert to Roth in same year?

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Boilermaker10
Posts: 18
Joined: Fri Mar 22, 2019 8:53 pm

SEP IRA convert to Roth in same year?

Post by Boilermaker10 » Mon Oct 07, 2019 10:15 am

Is it possible to contribute to an SEP IRA in 2019 and convert to Roth immediately to essentially raise my Roth space for 2019? I have no traditional or Sep balances at this time.

I have already maxed out both my wife and my Roth IRA contribution for 2019.

Why I am considering this. Taxable income for 2019 targeting 77k to stay in lower tax bracket. 30k of which will be Self employment income so could put 8,000ish into SEP. I cannot do Roth 401k from my understanding because I do not have a paycheck withholding nor am I going to set that up.

In January my wife starts a 100k/year job so our taxes will be higher from here forward. TIA

aristotelian
Posts: 6478
Joined: Wed Jan 11, 2017 8:05 pm

Re: SEP IRA convert to Roth in same year?

Post by aristotelian » Mon Oct 07, 2019 10:31 am

Boilermaker10 wrote:
Mon Oct 07, 2019 10:15 am

In January my wife starts a 100k/year job so our taxes will be higher from here forward. TIA
Your taxes in the next year (or 10 years) are irrelevant. You want to compare your current marginal rate to tax on distributions in retirement. Generally taxes in retirement are lower than your current marginal rate so I would keep the funds in the SEP.

Topic Author
Boilermaker10
Posts: 18
Joined: Fri Mar 22, 2019 8:53 pm

Re: SEP IRA convert to Roth in same year?

Post by Boilermaker10 » Mon Oct 07, 2019 10:34 am

aristotelian wrote:
Mon Oct 07, 2019 10:31 am
Boilermaker10 wrote:
Mon Oct 07, 2019 10:15 am

In January my wife starts a 100k/year job so our taxes will be higher from here forward. TIA
Your taxes in the next year (or 10 years) are irrelevant. You want to compare your current marginal rate to tax on distributions in retirement. Generally taxes in retirement are lower than your current marginal rate so I would keep the funds in the SEP.
Assume my taxes in retirement will be higher than the current 12%....

DSInvestor
Posts: 11035
Joined: Sat Oct 04, 2008 11:42 am

Re: SEP IRA convert to Roth in same year?

Post by DSInvestor » Mon Oct 07, 2019 10:56 am

Boilermaker10 wrote:
Mon Oct 07, 2019 10:15 am
Is it possible to contribute to an SEP IRA in 2019 and convert to Roth immediately to essentially raise my Roth space for 2019? I have no traditional or Sep balances at this time.

I have already maxed out both my wife and my Roth IRA contribution for 2019.

Why I am considering this. Taxable income for 2019 targeting 77k to stay in lower tax bracket. 30k of which will be Self employment income so could put 8,000ish into SEP. I cannot do Roth 401k from my understanding because I do not have a paycheck withholding nor am I going to set that up.

In January my wife starts a 100k/year job so our taxes will be higher from here forward. TIA
Once you have made a SEP-IRA contribution, the money in the SEP-IRA follows the same rules as Traditional IRA. You can convert any money in SEP-IRA to Roth IRA at any time.

If you are self employed with no employees, you can consider Solo 401k rather than SEP-IRA. If SEP-IRA allows 8K contribution, Solo 401k would allow 19K (employee salary deferral) + 8K (employer profit share). Some solo 401k plans allow for Roth 401k employee salary deferral contributions. No paycheck withholding is required if you're organized as a sole proprietor filing schedules C and SE. If you're organized as an S-Corp, you'd need a paycheck (W2) to do Solo 401k or SEP-IRA.

Do you reside in a state with high state income tax? Roth conversion income is subject to fed and state income taxes. The SEP-IRA contribution reduces your Fed AGI as well as your State AGI. If there is a chance that you may move to a state with no income tax, this might make a case to delay conversion.

Do you have assets in taxable accounts? If there is a mix of tax advantaged and taxable accounts, it may be possible to live off the taxable account for many years taking advantage of the 0% tax rate (fed) offered for Long Term Capital Gains (LTCG) and Qualified Dividend Income (QDI). While living off LTCG and QDI, this would be a great time to convert to Roth and take advantage of the 24k standard deduction giving you at least 24K of ordinary income (roth conversion) tax free.
Last edited by DSInvestor on Mon Oct 07, 2019 11:02 am, edited 1 time in total.
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aristotelian
Posts: 6478
Joined: Wed Jan 11, 2017 8:05 pm

Re: SEP IRA convert to Roth in same year?

Post by aristotelian » Mon Oct 07, 2019 10:57 am

Boilermaker10 wrote:
Mon Oct 07, 2019 10:34 am
aristotelian wrote:
Mon Oct 07, 2019 10:31 am
Boilermaker10 wrote:
Mon Oct 07, 2019 10:15 am

In January my wife starts a 100k/year job so our taxes will be higher from here forward. TIA
Your taxes in the next year (or 10 years) are irrelevant. You want to compare your current marginal rate to tax on distributions in retirement. Generally taxes in retirement are lower than your current marginal rate so I would keep the funds in the SEP.
Assume my taxes in retirement will be higher than the current 12%....
Then you should convert now... but I am not comfortable accepting the assumption. Check out these threads if you haven't already.
viewtopic.php?t=87471
viewtopic.php?t=212723

gclancer
Posts: 642
Joined: Sat Apr 27, 2013 10:34 am

Re: SEP IRA convert to Roth in same year?

Post by gclancer » Mon Oct 07, 2019 7:54 pm

Boilermaker10 wrote:
Mon Oct 07, 2019 10:15 am
I cannot do Roth 401k from my understanding because I do not have a paycheck withholding nor am I going to set that up.
Double check that assumption. Are you a sole proprietorship?

Spirit Rider
Posts: 11922
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA convert to Roth in same year?

Post by Spirit Rider » Mon Oct 07, 2019 9:43 pm

You are incorrectly calculating your maximum employer contribution. The maximum employer contribution is always 25% of compensation. In an S-Corp, your W-2 wages (compensation) would be reduced by the employer contribution.

For self-employed individuals it is calculated as 20% of self-employed earned income (business profit - 1/2 SE tax). This is because here again, employer contributions reduce compensation. Business profit = business income - business expenses. With $30K and no business expenses and your total earned income subject to SS taxes, your maximum SEP IRA employer contribution would be $5,576 (not anything close to $8K).

As others have pointed out a one-participant 401k is likely a better solution. If you adopted the plan at a provider that allows Roth 401k contributions and you do not otherwise make employee deferrals to another 401k, 403b, SARSEP or SIMPLE IRA plan. You can make up to a $19K one-participant 401k designated Roth contribution. Additionally, you could also make an employer contribution.

In the above $30K net profit case, the maximum employer contribution would be the lessor of 20% of self-employed earned income = $5,576 or (self-employed income - $19K) / 2 = $4,440. It would be the latter for the same reason that the self-employed maximum employer contribution calculation uses 20% of self-employed income.

Another reason to use a one participant 401k and designated Roth contributions. Is that pre-tax employer retirement plan contributions reduce your qualified business income used to calculate the new 20% QBI deduction.

Topic Author
Boilermaker10
Posts: 18
Joined: Fri Mar 22, 2019 8:53 pm

Re: SEP IRA convert to Roth in same year?

Post by Boilermaker10 » Tue Oct 08, 2019 8:15 am

I have a 401k at a w-2 job I contribute to get the company match. No more because of high fee funds (lowest is 1.3%). So solo Roth 401k is out. The self employed income is from a farm business so 30k is the net after expenses for 2019. Expect income to be high in retirement as both wife and I are savers and likely will inherit 1K acres of farm ground eventually with approx value of 8 million. With or without farm ground expect to be in higher tax bracket than 12% in retirement

gclancer
Posts: 642
Joined: Sat Apr 27, 2013 10:34 am

Re: SEP IRA convert to Roth in same year?

Post by gclancer » Tue Oct 08, 2019 8:29 am

Boilermaker10 wrote:
Tue Oct 08, 2019 8:15 am
I have a 401k at a w-2 job I contribute to get the company match. No more because of high fee funds (lowest is 1.3%). So solo Roth 401k is out.
You’re allowed to have/contribute to more than one 401(k) plan. The combination of employee contributions to both plans cannot exceed $19,000 in 2019, but it sounds like you’ve got some room to spare. Sounds like you could open a Solo 401(k) that allows Roth contributions (TD Ameritrade or Etrade offer Roth in their form plan documents) and contribute up to $19,000 minus what you contributed to your work 401(k) as Roth contributions and keep your QBI deduction which is a win-win.

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