Take the plunge? Convert SIMPLE-IRA to Roth and pay the tax in 2018

[runfast00]

We had an unexpected business loss (really it was deprecation that was accelerated into one tax year). It is not a cash loss, but a balance sheet loss, that makes me have a significantly negative income for the practice for this year only.

This amount is about 30% of my annual personal annual income.  I'm a young physician with no personal debt and about 100k in SIMPLE IRA investments (from the medical practice).

I have about 30K in Roth investments (from residency) and about 10K in an individual 401k (from a side gig).

Due to the SIMPLE it is hard to do back-door Roth. However I could 'make lemonade from lemons' and convert all the SIMPLE to Roth IRA this year.

 

I would pay taxes on it in 2018, but due to the business loss I would still be in 24% bracket MFJ for 2018.

 

Poll: do I..

A) Convert SIMPLE to Roth IRA in 2018 and take the tax hit

B) Move part SIMPLE to 401k and convert a percentage to Roth IRA

C) Move all SIMPLE to 401k and do a back door ($5,500) from 401k in 2018

D) Leave it as is and pay much less taxes for 2018.

 

 

[Peds]

all of it would be in 24% or some in 22?

maybe convert up to 24% bracket if thats the case.

Then the rest, move to 401k and do backdoor rIRA.

[runfast00]

I think some might be in 22% tax bracket, some in 24%.  Being a physician owner in a business means you don't always know the income until Feb of the next  year.  Based on where this year is looking I bet about half would be in the 22% bracket.

 

I like your idea of converting up to the 24% line, but I'm not sure I'll know exactly how much that is.

 

 

[spiritrider]

runfast00 wrote:

C) Move all SIMPLE to 401k and do a back door ($5,500) from 401k in 2018

Click to expand...

??? You don't do a backdoor Roth from a 401k.

A backdoor Roth is non-deductible traditional IRA contribution followed by a Roth conversion with little to no tax liability. The purpose of rolling over or converting the SIMPLE IRA is so that you have little to no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts on 12/31 of the year of the Roth conversion so there is little to no tax liability.

 

[runfast00]

Good call spiritrider.  I just started my individual 401k this year (2018) from side gig income.  This is my first opportunity to do a back door Roth without tax liability if all other IRA accounts are $0 on December 31, 2018.

 

However, this year I also have a projected down year in total income (due to LLC loss). So if you were in this scenerio would you just do the $5,500 or take advantage of this unusual event to convert an extra to Roth to grow tax free?

[spiritrider]

There is no absolute right answer.

If you were not going to convert in the current tax bracket absent the loss, the loss itself should not change that.

If any of the loss causes you to drop into a lower tax bracket, it could make sense to convert to the top of that bracket.

You can do a lot projections, but nobody really knows the future. At the 22% and 24% brackets sometimes it just come down to choice.

[jfoxcpacfp]

You can control your tax bracket to some extent by:

• "Choosing" how much depreciation to take in the first year of an equipment purchase;


• Choosing which bills to pay before year's end (never seen a practice that wasn't cash basis); and


• Using your credit card to charge expenses by 12/31 in order to report them on the current year's tax return.

Because you do have a measure of control, mainly driven by your depreciation option, your CPA should be able to get fairly close to the amount to convert to a Roth in 2018 to remain in the 24% bracket (my choice).

Should ask if you have been participating in the SIMPLE for at least 2 years - with a $100k balance, that is surely so (right???)

[runfast00]

jfoxcpacpf...correct. Participation in SIMPLE for about 6 years now.

Depreciation due to a lease abandement as our office moved to a new space. So it was scheduled to spread out over many years but it is compressed into this tax year as we left it in 2018. Not sure it can be spread out given the situation.

[jfoxcpacfp]

runfast00 wrote:

jfoxcpacpf…correct. Participation in SIMPLE for about 6 years now.

Depreciation due to a lease abandement as our office moved to a new space. So it was scheduled to spread out over many years but it is compressed into this tax year as we left it in 2018. Not sure it can be spread out given the situation.

Click to expand...

Nope, unfortunately, it can’t. I should have been able to read the lines, sorry ‘bout that, but hope it will help someone else  !