Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Cyanide123
Posts: 105
Joined: Sun May 05, 2019 9:14 am

Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by Cyanide123 » Sun Jul 14, 2019 12:13 am

While learning I made a few mistakes. I prematurely opened not just one but two sep IRA accounts (one last year and one this year).

Now I understand that solo 401k is better since it will let me do backdoor Roth conversions.

I only have a few grand in my sep IRA accounts. First account ~ 1.2 k at m1 finance. Second account ~ 2.7k at vanguard. I haven't even taken a tax deduction on this 2.7k yet.

I want to do a solo 401k with etrade. Is it better/easier to do a rollover or just simply take the tax hit, close the accounts, and start a new account with etrade. If I close, can I put money in a solo 401k the same year to the max limit?

Annual 1099 income ~ 300k this calendar year and ~ 450k next calendar year.

On a side note, is the contribution limit for a non deductible IRA 6k for both myself and my spouse if filling jointly or is it 6k each, so a total of 12k. Just trying to understand if I need to do two nondeductible IRA accounts, one for each of us.

mhalley
Posts: 7144
Joined: Tue Nov 20, 2007 6:02 am

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by mhalley » Sun Jul 14, 2019 2:02 am

Sorry I don't know the rules about changing retirement plans mid year. This article discusses it here
http://www.consultrms.com/Resources/30/ ... o-a-401(k)
TERMINATING A SEP: A SEP may be terminated at any time and all funding can stop once the plan is terminated. The financial institution should be notified that the contributions will stop and that the contract or agreement should be terminated. It is a good idea to notify the employees that the plan has been discontinued. No notice has to be provided to the IRS about the SEP termination. Employees may take a distribution from the SEP or may roll their SEP account into the new 401(k) plan or into an IRA. Although an employer may sponsor both a SEP and a 401(k) in the same year, there is no benefit to doing so because employer contributions to both plans are combined when determining the annual limit of $54,000. The IRS also stipulates that an employer may not maintain a SEP and a 401(k) in the same year if the SEP was established using IRS Form 5305.
At that high an income level I would lean toward just taking the tax hit by rolling it over to a roth. Depends on how much hassle the rollover to the solo 401k would be. The IRA limit is 6k each. It is an INDIVIDUAL retirement account, so you must have one for you and one for spouse. So you would need 2 traditional IRA accounts and 2 ROTH IRA accounts to get 12k total.
https://www.cnbc.com/2018/11/01/heres-h ... -2019.html

User avatar
southerndoc
Posts: 998
Joined: Wed Apr 22, 2009 7:07 pm
Location: Atlanta

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by southerndoc » Sun Jul 14, 2019 2:34 am

I also would roll to a Roth.

You can't have a Solo 401(k) in the same year as a SEP (barring some exceptions). So if you've made contributions to the SEP, I don't believe you can open the Solo 401(k) this year. I know you can't have both plans active at the same time.

Spirit Rider is the forum expert on this. I'll defer to him for a definitive answer, but from what I gather, I believe the above is correct.

If you want to rollover the current SEP's into a Solo 401(k), Vanguard's Solo 401(k) will not allow rollovers. You will need to open with another broker. I opened with Fidelity to rollover my SEP and then later amended my Solo 401(k) to Vanguard.

retiredjg
Posts: 36804
Joined: Thu Jan 10, 2008 12:56 pm

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by retiredjg » Sun Jul 14, 2019 7:46 am

Cyanide123 wrote:
Sun Jul 14, 2019 12:13 am
I want to do a solo 401k with etrade. Is it better/easier to do a rollover or just simply take the tax hit, close the accounts, and start a new account with etrade. If I close, can I put money in a solo 401k the same year to the max limit?
If you close the accounts and take the tax hit, you will also be required to pay a 10% penalty for early withdrawal.

If you convert each to Roth, you will pay tax on it, but this is obviously a better option than early withdrawal.

Or wait until you can open the one-participant 401k and roll the IRAs into it (being sure your plan allows that).


On a side note, is the contribution limit for a non deductible IRA 6k for both myself and my spouse if filling jointly or is it 6k each, so a total of 12k. Just trying to understand if I need to do two nondeductible IRA accounts, one for each of us.
Two IRAs, $6k each, two Roth conversions, two 8606 Forms. Get the paperwork figured out before doing this. A lot of people mess it up and getting it fixed 2 years later is a headache.

Topic Author
Cyanide123
Posts: 105
Joined: Sun May 05, 2019 9:14 am

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by Cyanide123 » Mon Jul 15, 2019 1:10 am

retiredjg wrote:
Sun Jul 14, 2019 7:46 am
Cyanide123 wrote:
Sun Jul 14, 2019 12:13 am
I want to do a solo 401k with etrade. Is it better/easier to do a rollover or just simply take the tax hit, close the accounts, and start a new account with etrade. If I close, can I put money in a solo 401k the same year to the max limit?
If you close the accounts and take the tax hit, you will also be required to pay a 10% penalty for early withdrawal.

If you convert each to Roth, you will pay tax on it, but this is obviously a better option than early withdrawal.

Or wait until you can open the one-participant 401k and roll the IRAs into it (being sure your plan allows that).


On a side note, is the contribution limit for a non deductible IRA 6k for both myself and my spouse if filling jointly or is it 6k each, so a total of 12k. Just trying to understand if I need to do two nondeductible IRA accounts, one for each of us.
Two IRAs, $6k each, two Roth conversions, two 8606 Forms. Get the paperwork figured out before doing this. A lot of people mess it up and getting it fixed 2 years later is a headache.
So I'm going ahead with the Roth conversion of both Sep IRA accounts.

I'm setting up my Solo 401k with E-trade. Once my Sep IRA accounts are closed, can I make contributions to the solo 401k this calendar year? Or should I wait until the next tax year. Is there any issue with IRS to set up the account before the Sep IRAs are closed? Or to even have the account set up, the Sep IRAs have to be closed (even if no contributions are made).

lakpr
Posts: 1887
Joined: Fri Mar 18, 2011 9:59 am

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by lakpr » Mon Jul 15, 2019 1:34 am

I think your question has been answered already. You cannot have both SEP IRA and the "one participant 401k" active in the same calendar year. Your Solo 401k can be opened only for 2020

JDDS
Moderator
Posts: 992
Joined: Sun Mar 16, 2014 2:24 pm

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by JDDS » Mon Jul 15, 2019 2:26 am

You likely want to contribute for 2019 to the SEP before closing it. The larger amount in the SEP may change your mind about converting to Roth; however, even if it does not then you have gotten more money into a Roth which is more valuable than taxable.

aristotelian
Posts: 5812
Joined: Wed Jan 11, 2017 8:05 pm

Re: Setting up for back door Roth. Need to close Sep IRA, rollover, or sell?

Post by aristotelian » Mon Jul 15, 2019 6:16 am

I would roll it into the Solo 401k but wait until next year since you can't have both in the same year. Just save in taxable this year while excluded from Roth.

Post Reply