Announcement

Collapse
No announcement yet.

Need *simple* instructions for Backdoor Roth IRA

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • litovskyassetmanagement
    replied




    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

     

    Leave a comment:


  • jfoxcpacfp
    replied


    Thoughts?
    Click to expand...


    Get a new financial advisor?

    Leave a comment:


  • alloykat
    replied
    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?

    Leave a comment:


  • litovskyassetmanagement
    replied




    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.

    Leave a comment:


  • Slav4ikMD
    replied
    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!

     

     

    Leave a comment:


  • jfoxcpacfp
    replied




    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.

    Leave a comment:


  • litovskyassetmanagement
    replied
    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.

     

    Leave a comment:


  • Slav4ikMD
    replied
    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...)

    Leave a comment:


  • litovskyassetmanagement
    replied
    Good question. This is money that goes into a non-deductible Traditional IRA.  You are converting this to Roth, this is not 'after-tax' money.  IRS rules might not make sense sometimes, but this is what it is - a rule that has to be followed.  So you can show this to your CPA who most likely should know about this.  After all, if you do this, your CPA would have to calculate pro-rata taxes on the conversion.

    Leave a comment:


  • Slav4ikMD
    replied
    Ok here is what I am confused about:  "if you have a $95,000 traditional IRA (pre-tax contributions), and you convert a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable.” - the $5000 that I put in is post-tax money, isn't it?  So say I have 95k in a sep from before, now I put in 5k into an IRA and convert to Roth immediately, what actually physically happens in terms of what extra I may owe in taxes?

    (sorry if I am asking really dumb questions)

    Leave a comment:


  • litovskyassetmanagement
    replied
    Yes, you can have a backdoor Roth with a SEP IRA, but you will have to pay pro-rata taxes on any conversions you make to Roth.

    http://www.forbes.com/sites/ashleaebeling/2012/01/23/the-backdoor-roth-ira-advanced-version/#48a16b805556

    So you will owe taxes on the conversion:

    "The barrier to the backdoor Roth—in many folks’ minds—is the pro rata rule. The rule says that you have to aggregate all your IRAs to determine how much income tax you owe when you convert. If you have no other IRAs and you open a $5,000 nondeductible IRA and then convert it, you only owe tax on the earnings, if any. By contrast, if you have a $95,000 traditional IRA (pre-tax contributions), and you convert a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable."

    Leave a comment:


  • Slav4ikMD
    replied
    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

    I found this:  https://www.bogleheads.org/wiki/Backdoor_Roth_IRA   So if I put say 20k into a sep and 5500 backdoor, then the 14500 is taxes and I lose the benefit of the sep, is that right?  Thanks!

    Leave a comment:


  • litovskyassetmanagement
    replied




    Thanks guys.  This looks a little complicated for DIY, so I will either have to spend some time learning this a bit or talking to my CPA/CFP.  Don’t want to waste your time on free advice, but help me quickly gauge whether it is time for me to start customizing and thinking of other more complex strategies:  I am fairly early in my career, have a W2 job with a 457 plan that I max out at 18k, and currently have a self-employed income of around 150k – for the next two years self-employment will likely grow slightly and W2 will stay (hard to predict what I will do later).  Time to “customize” or not yet?  Is 53k currently my limit for all plans or there are more creative paths to explore?  Thanks!
    Click to expand...


    There are many different strategies that can be employed depending on many factors, and all of them have to be customized to your specific situation (especially if you have significant self-employment income).  Whoever your adviser is, they should be able to help you with tax planning as well as with retirement plan set up and management, and they should put together a plan to address your entire financial situation and help you implement it. This stuff is definitely not DIY for most doctors, though some might have the time and the inclination to do things themselves.  However, there are too many moving parts when you are self-employed, so there is also a possibility to add significant value with good advice.

    Leave a comment:


  • Slav4ikMD
    replied
    Thanks guys.  This looks a little complicated for DIY, so I will either have to spend some time learning this a bit or talking to my CPA/CFP.  Don't want to waste your time on free advice, but help me quickly gauge whether it is time for me to start customizing and thinking of other more complex strategies:  I am fairly early in my career, have a W2 job with a 457 plan that I max out at 18k, and currently have a self-employed income of around 150k - for the next two years self-employment will likely grow slightly and W2 will stay (hard to predict what I will do later).  Time to "customize" or not yet?  Is 53k currently my limit for all plans or there are more creative paths to explore?  Thanks!

    Leave a comment:


  • litovskyassetmanagement
    replied




    My SEP is tiny, around $8000 – I did it my first year of self-employment, not even sure why, should have done a solo 401k but my incompetent former accountant told me that it is “very expensive to open” and I should do a SEP.  Lesson learned.

    Anyway, ok so what’s the advantage of converting it to a roth IRA now?  That I would be able to do Backdoor, or something else as well?

    My concern is this:  in a couple of years my self-employed income will (hopefully) grow (and possible replace all W2 income), so it would in fact make more sense for me to do a sep rather than solo 401k (with a goal of maximizing my pre-tax retirement savings).  If I did that, then can’t do backdoor?  Thoughts?
    Click to expand...


    You might want to convert that SEP to Roth because Vanguard solo 401k does not accept incoming withdrawals. This is how you turn your Vanguard solo 401k into a 401k that accepts incoming withdrawals and allows in-plan Roth conversions (and after-tax contributions as well):

    https://www.whitecoatinvestor.com/improving-the-vanguard-individual-401k-with-a-customized-plan

    Once your 1099 income increases, you will definitely want to customize your solo 401k for the following reasons:

    1) Roll your other retirement plans into it once you become fully self-employed (and allow many of the features that are great to have for your personal retirement plan listed above)

    2) Potentially add a defined benefit plan to your solo 401k to increase your contribution beyond $53k allowed by the solo 401k, provided that this plan makes sense for you:

    http://quantiamd.com/player/ygvmhdmbm?cid=1467

     

     

    Leave a comment:

Working...
X