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Roth Conversion - A slightly different question

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  • Roth Conversion - A slightly different question

    Asking the wise men and women of this board since I have not done any Roth conversion so far.


    Scenario: My wife and I have an IRA since the 1990's that is mainly non deductible IRA in Schwab and invested in Schwab index funds +/- some equities. Puttering along.

    Secondly, a SEP IRA in a brokerage that I could only contribute for 2 years when I stated my practice. After that, the other employees were unwilling to join and I stopped contributing to it. Doing OK.

    Current problem: I worked for a multispeciality group for 7 years before I opened my practice.  There was a minimal match, so I contributed to it. I have left it with the same 401K management company for 16 years even though I have not been employed by the group (procrastination and being very busy starting a solo practice). This July the practice was bought out by a hospital and I got a notice that the retirement plan is being terminated and I have until 11/15 to initiate a roll over into my own retirement account.

    When I attempted to see if can open an IRA account with Vanguard, where my daughter had UGMA account it gave me two options - traditional IRA and conversion to Roth while doing the transfer. Since the amount was only $45K I though of doing the 401K to Roth conversion for this account and paying the capital gains tax on the gains. But then I have 2 other IRA's and I wondered if the rules prevent only one of the retirement plans to be converted to the Roth, keeping the other 2 unchanged. Or am I only allowed to roll over to a traditional IRA in this scenario.

    I think this board is more knowledgeable on Roth conversions than my CPA. And he has a vested interest into steering me to the load funds that gives him an incentive for enrollment.


    Thanks y'all.


  • #2
    First of all, you won't be paying capital gains taxes on the conversion. You'll pay ordinary income taxes at your marginal tax bracket (unfortunately). The reasoning makes sense - you reduced ordinary income taxes when you contributed and now you are reversing the transaction.

    Yes, you can convert as much or as little of your IRAs as you want. I am distressed to know I presume you are not contributing to backdoor Roth IRAs? Also, this must be 2 separate IRAs, one each for you and your wife, correct? You cannot have a "joint" IRA.

    You have several moving parts that need to be cleaned up and integrated into a plan to improve your overall returns and growth of wealth. Might want to talk to a fee-only CFP (obviously not your CPA).
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      'Mainly' non deductible has to be qualified - your CPA has to tell you exactly how much is deductible and how much is not.  But prior to converting, you will want to move your SEP and your old 401k into another 401k.  I presume you are currently a W2 employee for the hospital?  If you have any 1099 income, the ideal approach would be to roll your deductible IRAs (including SEP) into that solo 401k.  You can always roll these IRAs into your Hospital 401k, but that might not be the best way to proceed as then you don't have nearly as much control over the money and chances are that the plan does not have the best investments available.
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees


      • #4
        Thank you Johanna and Kon for your replies.

        I know I should stream line things but the possibility of Roth conversion occurred only in 2008 and by that time I had the non deductible IRA ( both me and my wife have separate ones) for 18 years and a SEP IRA that I contributed for 2 years. At that time I did not have the time to bring it all into one IRA and was in a high income tax bracket and thus would have paid high ordinary taxes on the gains.

        Unfortunately since i am self employed and do not have resources to fund for employees I don't have a retirement 401K in my office. Just continuing the non deductible IRA for my wife and me. Luckily I have good alternative income from investments in hotels.

        Johanna, I would like to start contributing to backdoor Roth once I understand the process fully and make sure I don't run afoul of the IRS rules. So if I understand you correctly I can convert this old 401K from my previous employer to Roth IRA and pay ordinary income tax without doing anything to the non deductible IRA and SEP plan and leave them as they are for another year or so. I am hoping to find a year when my tax rate is low that I can convert all my retirement plans to Roth, pay the ordinary gains tax and be free of of future taxes.


        • #5
          Depending on the number of employees you have it might make sense to do a SIMPLE IRA or a 401k, and it might be better having some type of retirement plan than paying taxes (basically, you 'pay to play', and the game is worth it if you can beat 'after-tax' with 'tax-deferred plus expenses').  Of course, the numbers will dictate what type of plan you might want (or none at all, if your practice demographics is not in your favor).  Here's an article that provides more details on whether to consider a SIMPLE IRA or a 401k:

          Of course, with a SIMPLE doing backdoor might also be difficult, but if you do have a 401k (even a Safe Harbor), this will allow you to consolidate your accounts in one place.  Also, one feature of 401k plans is the ability to do in-plan Roth conversions, so you can convert any part of your 401k to Roth at any time.  For small practice plans I prefer pooled 401k plans vs. participant-directed, and depending on your demographics you might not be on the hook for too much as far as employer contribution.

          However, if you are in a lower bracket, doing Roth conversions is also a great idea, so your plan might also work just fine.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees