SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

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epicwinter
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Joined: Thu Mar 14, 2019 12:28 pm

SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by epicwinter » Thu Mar 14, 2019 12:56 pm

I have an old SEP IRA account that has no balances (rolled them into an employer sponsored 401k in a previous calendar year so that I could effect backdoor Roth IRA contribution, and have no further forseeable need for the SEP IRA based on change in employment status to W2, but have kept it open just in case I might use or need it in the furture).

I don't have a traditional IRA account presently (but could open one at Fidelity, where I have other accounts, including Roth IRA).

Could I use the SEP IRA account as the taxable account to which to make the initial 2019 IRA contribution, then roll it over to the Roth IRA the following day and not experience any adverse consequences, or should I open a traditional IRA account to which to make the initial contribution for the subsequent backdoor Roth rollover?

Thanks!

SRenaeP
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Joined: Tue Jan 19, 2010 9:05 pm

Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by SRenaeP » Thu Mar 14, 2019 2:02 pm

Do you have self-employment/Schedule C income to qualify for contributing to a SEP IRA?

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Duckie
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Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by Duckie » Thu Mar 14, 2019 4:39 pm

epicwinter wrote:Could I use the SEP IRA account as the taxable account to which to make the initial 2019 IRA contribution, then roll it over to the Roth IRA the following day and not experience any adverse consequences,
Could you contribute to the SEP IRA and convert to the Roth IRA? Yes, but...
or should I open a traditional IRA account to which to make the initial contribution for the subsequent backdoor Roth rollover?
I believe it is better to keep employer plans like SEP IRAs separate from personal plans like TIRAs. So I recommend you open a TIRA for the backdoor Roth method. I would also close the empty SEP IRA just to simplify things.

Spirit Rider
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Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by Spirit Rider » Thu Mar 14, 2019 7:57 pm

I agree with @Duckie.

While a SEP IRA can accept traditional IRA contributions. You must proactively identify it as a traditional IRA contribution and the custodian must track it as a traditional IRA contribution. Too many things to go wrong in my mind.

Topic Author
epicwinter
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Joined: Thu Mar 14, 2019 12:28 pm

Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by epicwinter » Tue Mar 19, 2019 5:48 pm

Thanks all!

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celia
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Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by celia » Tue Mar 19, 2019 6:03 pm

epicwinter wrote:
Thu Mar 14, 2019 12:56 pm
I have an old SEP IRA account that has no balances (rolled them into an employer sponsored 401k in a previous calendar year so that I could effect backdoor Roth IRA contribution, and have no further forseeable need for the SEP IRA based on change in employment status to W2, but have kept it open just in case I might use or need it in the furture).
Since the SEP IRA is meant to hold employer contributions, I suspect the account is tagged to your old employer. If a new employer offers a SEP, I'm pretty sure you would have to open a new SEP IRA anyways that is tied to the new employer.

It's so easy to open a new account. Why re-use an account that had a different purpose (and legal restrictions) that might come back to bite you in the future? Employer contributions are not deductible to you or nondeductible to you. That's one specific problem you'll have.

It is also like asking if your SEP contributions can be put into your traditional IRA. How well will that work when each has different maximum contributions? That's another problem.

SRenaeP
Posts: 870
Joined: Tue Jan 19, 2010 9:05 pm

Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by SRenaeP » Tue Mar 19, 2019 7:54 pm

celia wrote:
Tue Mar 19, 2019 6:03 pm
epicwinter wrote:
Thu Mar 14, 2019 12:56 pm
I have an old SEP IRA account that has no balances (rolled them into an employer sponsored 401k in a previous calendar year so that I could effect backdoor Roth IRA contribution, and have no further forseeable need for the SEP IRA based on change in employment status to W2, but have kept it open just in case I might use or need it in the furture).
Since the SEP IRA is meant to hold employer contributions, I suspect the account is tagged to your old employer. If a new employer offers a SEP, I'm pretty sure you would have to open a new SEP IRA anyways that is tied to the new employer.

It's so easy to open a new account. Why re-use an account that had a different purpose (and legal restrictions) that might come back to bite you in the future? Employer contributions are not deductible to you or nondeductible to you. That's one specific problem you'll have.

It is also like asking if your SEP contributions can be put into your traditional IRA. How well will that work when each has different maximum contributions? That's another problem.
A SEP IRA doesn't have to be employer contributions. It can also be for self-employment income.

Spirit Rider
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Re: SEP IRA acct as first stop for backdoor Roth IRA contribution, or open traditional IRA acct?

Post by Spirit Rider » Tue Mar 19, 2019 10:24 pm

SRenaeP wrote:
Tue Mar 19, 2019 7:54 pm
A SEP IRA doesn't have to be employer contributions. It can also be for self-employment income.
SEP IRA contributions must be employer contributions.

When you are self-employed you are both employer and employee. If you are making SEP IRA contributions from self-employment earned income they are employer contributions.

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