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Need *simple* instructions for Backdoor Roth IRA

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  • #16
    Oy way too complex.  But I see, I didn't realize this was not after-tax money.

    I'll try to research this a bit more to understand better.

    But in short, do you think it is still ok to do and then figure out the numbers, or having an old small SEP might seriously hurt me and make doing a backdoor a moot point unless I get rid of the SEP?  (I plan on having a SEP for this year as well, in addition to a 401k - it's complicated...)

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    • #17
      Just convert the SEP to Roth and get it over with rather than worry about pro rata rules.  Don't get too hung up on it. Alternatively, you can do a solo 401k, roll the SEP into it and then do backdoor Roth.  There is still time.

       
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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      • #18




        Guys, I spoke to my accountant and he said that having a sepIRA does not in any way preclude me from setting up a backdoor Roth and there would not be any additional taxation on anything.  Is he wrong?  Honestly I am beyond confused.  If I keep the sepIRA and do the backdoor Roth, what exactly gets taxed extra?  Please use very simple language
        Click to expand...


        YES, he is wrong. :roll:

        The IRS implemented this rule to make sure that you convert any taxable accounts to a Roth before you start contributing after tax money to a Roth. It's pretty logical if you think about it.

        I concur with Kon - as long as you can fund your SOLO-k by 4/15/17, there is absolutely no reason that you should have a SEP rather than a SOLO-k (unless your really smart accountant told you that was not possible, either). You'll be able to contribute the exact same amount and this money won't be subject to the pro-rata rules for back-door Roths. And if you forgo the $18k employee contribution at your day job, you'll be able to contribute even more to your SOLO.

        btw, no need for me to explain the calculation again because you have already figured it out.

        Since your SEP is only $8k, go ahead and convert and take the tax hit then do the back-door Roth.
        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #19
          And here I thought that my new CPA was da man.  Hmmm.  So ok, I can convert that old small SEP, not a problem.  But here is my situation for 2016 and please tell me if my guy is way off with what he suggests:

          I have a W2 job with a 457 plan, 18k put away for this year.

          I have a PLLC which was run as an S-corp, which I dissolved as of July.  So for first part of the year I have a solo 401k set up, put away 18k plus 6750 employer contribution.

          Now for second half of the year the PLLC is run as solo proprietorship and my CPA said that for this part of the year I should do a SEP - can I?? (If so, does it make sense for me to do that and just forgo the backdoor thing?)

          For next year and going forward I will continue to just have the 457 and solo 401k.

          Thanks guys, you are the best!

           

           

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          • #20




            And here I thought that my new CPA was da man.  Hmmm.  So ok, I can convert that old small SEP, not a problem.  But here is my situation for 2016 and please tell me if my guy is way off with what he suggests:

            I have a W2 job with a 457 plan, 18k put away for this year.

            I have a PLLC which was run as an S-corp, which I dissolved as of July.  So for first part of the year I have a solo 401k set up, put away 18k plus 6750 employer contribution.

            Now for second half of the year the PLLC is run as solo proprietorship and my CPA said that for this part of the year I should do a SEP – can I?? (If so, does it make sense for me to do that and just forgo the backdoor thing?)

            For next year and going forward I will continue to just have the 457 and solo 401k.

            Thanks guys, you are the best!

             

             
            Click to expand...


            Sure you can, but why would you want to?  You already have a solo 401k so you can continue using that (and roll your SEP into it, if the plan document allows it).  Ok, so your EIN changed, but this is not a big deal.  Just because you changed the way you operate does not make your previous retirement plan somehow invalid.  Ask your CPA what his problem with using your current solo 401k is.
            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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            • #21
              I just spoke to my financial advisor about the backdoor Roth. He said that having  SEP IRA or pre-tax traditional IRA does not preclude doing a backdoor Roth and there will be NO need to pay taxes on what is already in the pre-tax traditional IRA or SEP IRA as long as no contribution was made to the traditional IRA or SEP IRA during calendar year that one plans to do the backdoor Roth. This can be done by opening a brand new traditional IRA, funding it and then immediately converting it to a Roth IRA. Thus, as long as I don't convert 5.5K from the IRA I already have, I don't have to pay taxes. This seems contrary to all that I have read. Thoughts?

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              • #22


                Thoughts?
                Click to expand...


                Get a new financial advisor?
                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #23




                  I just spoke to my financial advisor about the backdoor Roth. He said that having  SEP IRA or pre-tax traditional IRA does not preclude doing a backdoor Roth and there will be NO need to pay taxes on what is already in the pre-tax traditional IRA or SEP IRA as long as no contribution was made to the traditional IRA or SEP IRA during calendar year that one plans to do the backdoor Roth. This can be done by opening a brand new traditional IRA, funding it and then immediately converting it to a Roth IRA. Thus, as long as I don’t convert 5.5K from the IRA I already have, I don’t have to pay taxes. This seems contrary to all that I have read. Thoughts?
                  Click to expand...


                  Looks like your adviser does not know about pro-rata rules.  Try this link:

                  http://www.forbes.com/sites/ashleaebeling/2012/01/23/the-backdoor-roth-ira-advanced-version/#7cc0ad895556

                   
                  Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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