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Please help me get rid of my SEP-IRA immediately

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  • Please help me get rid of my SEP-IRA immediately

    I made the mistake of starting a SEP-IRA at Vanguard for my wife, who is a sole proprietor, a few years ago. I want to be able to do backdoor roth and don't want to deal with calculating pro rata, moreover, its just an extra retirement account that I'd prefer to eliminate so I can consolidate her accounts. it's just been sitting with about $7500 in VTI. I want to get rid of it. Can someone please tell me how to do this? I don't mind paying taxes on the full amount this year.

    Currently, she has
    1. SEP IRA
    2. Traditional IRA (after tax)
    3. Roth IRA

    How exactly do I roll over the SEP to the traditional? will it automatically generate a tax form next year? I am above limit for tax deductible traditional IRA, but the SEP IRA was pre-tax. do I need to fill out for 8606? those things are such a hassle...

  • #2
    Solo 401k.

    Comment


    • #3
      Originally posted by Peds View Post
      Solo 401k.
      I know s401k is the right answer for long-term planning; but are you saying i should transfer SEP-IRA to solo 401k? if so, that would remain pretax?

      i'm more interested in ultimately doing a roth IRA so that i can get red of both the SEP-IRA and the nondeductible IRA.

      Comment


      • #4
        options are

        1 rollover sep Ira to Roth. This is taxable at your marginal rate

        2 rollover sep Ira to solo 401k. Stays pretax but is more complex

        assume you’ve been doing form 8606 yearly if making nondeductible Ira contributions

        Comment


        • #5
          I opened a Solo 401(k) at Fidelity for this reason. Transferred my SEP to the Fidelity Solo 401(k) and a few months later amended my Solo 401(k) to Vanguard and added a Roth option.

          Make sure you read up thoroughly on it before you do it. The Solo 401(k) requires additional paperwork and you must abide by the rules (i.e., I transferred my SEP to Fidelity in May and then amended my plan to Vanguard the following May; I didn't have a Roth option for 2018... I could make employer contributions up to my tax deadline of 10/15/18, but I could not make any Roth contributions as my plan didn't have a Roth option in 2018 or before 05/2019).

          As long as you read up and become familiar with what you're doing, it shouldn't be a problem.

          Comment


          • #6
            Is transferring to the traditional IRA not an option option?

            would I be rolling over to a Roth directly?

            Comment


            • #7
              Originally posted by GastroMastro View Post
              Is transferring to the traditional IRA not an option option?

              would I be rolling over to a Roth directly?
              SEPs, SIMPLE IRAs, and traditional IRAs all have pro rata taxation problems that hurt you if you make a back door Roth contribution. If you convert your SEP to a Roth IRA, that conversion is taxable at your marginal tax rate. Try to avoid these problems by rolling the SEP into a 401(k).

              Also, Vanguard solo 401(k)s won’t let you roll money in from a SEP or an IRA.
              Last edited by Hank; 01-29-2020, 11:20 AM.

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              • #8
                Originally posted by GastroMastro View Post
                I made the mistake of starting a SEP-IRA at Vanguard for my wife, who is a sole proprietor, a few years ago. I want to be able to do backdoor roth and don't want to deal with calculating pro rata, moreover, its just an extra retirement account that I'd prefer to eliminate so I can consolidate her accounts. it's just been sitting with about $7500 in VTI. I want to get rid of it. Can someone please tell me how to do this? I don't mind paying taxes on the full amount this year.

                Currently, she has
                1. SEP IRA
                2. Traditional IRA (after tax)
                3. Roth IRA

                How exactly do I roll over the SEP to the traditional? will it automatically generate a tax form next year? I am above limit for tax deductible traditional IRA, but the SEP IRA was pre-tax. do I need to fill out for 8606? those things are such a hassle...
                basically you are going to open a solo 401k, rollover the the SEP to get rid of it.
                then you are going to convert the nondeductible tIRA to a rIRA and pay tax on any gains. your basis should have been tracked on form 8606.
                then you can do a regular bdrIRA.

                hence my initial answer, solo 401k.

                Comment


                • #9
                  The presence of your wife's SEP has nothing to do with you doing a backdoor Roth. Are you taking about doing a backdoor Roth for her?

                  Comment


                  • #10
                    Originally posted by Hank View Post

                    SEPs, SIMPLE IRAs, and traditional IRAs all have pro rata taxation problems that hurt you if you make a back door Roth contribution. If you convert your SEP to a Roth IRA, that conversion is taxable at your marginal tax rate. Try to avoid these problems by filling the SEP into a 401(k).

                    Also, Vanguard solo 401(k)s won’t let you roll money in from a SEP or an IRA.
                    Thanks for everyone responses. My goal is to find a solution, any solution, that will allow me to stay within Vanguard. I know plenty of people on this forum are nimble with multiple brokerages, but the whole point of this is to make things easier for me, not more complicated as I already wasted my time making it unnecessarily complicated. I am willing to pay a conversion at my marginal tax rate for converting SEP to ROTH IRA, it is only about 7500 in the SEP-IRA so the taxes won't be too much. If I do this, will that count as her regular roth IRA contribution for this year? If I do this, can I only do 6000 this year (max roth contribution in a year) and have to do the remaining ~1500 next year? (which I would be fine with...)

                    Comment


                    • #11
                      You didn't say that.
                      If those are your rules conversion is your only choice.
                      Conversions are not contributions.

                      Comment


                      • #12
                        Originally posted by Peds View Post
                        You didn't say that.
                        If those are your rules conversion is your only choice.
                        Conversions are not contributions.
                        Yes I apologize. That was clearly an omission.

                        so, if I do a vanguard sep to vanguard Roth Conversion, that will trigger a taxable event. That will cause vanguard to generate a form (which form?) that I need to report on my next years tax return. Do I need to do anything with the 8606? I’m guessing no. Is the fact that I have a nondeductible IRA Have anything to do with the fact that I’m converting sep Ira to Roth IRA, ie, don’t have to do any pro rata calculation correct? I am completely bypassing the tIRA?

                        Comment


                        • #13
                          Originally posted by GastroMastro View Post

                          Yes I apologize. That was clearly an omission.

                          so, if I do a vanguard sep to vanguard Roth Conversion, that will trigger a taxable event. That will cause vanguard to generate a form (which form?) that I need to report on my next years tax return. Do I need to do anything with the 8606? I’m guessing no. Is the fact that I have a nondeductible IRA Have anything to do with the fact that I’m converting sep Ira to Roth IRA, ie, don’t have to do any pro rata calculation correct? I am completely bypassing the tIRA?
                          1099
                          you should have been doing 8606 for the nondeductible tIRA
                          youll be converting the entire tIRA to a rIRA as well so there will be nothing to prorate.

                          Comment


                          • #14
                            Originally posted by Peds View Post

                            1099
                            you should have been doing 8606 for the nondeductible tIRA
                            youll be converting the entire tIRA to a rIRA as well so there will be nothing to prorate.
                            Thanks peds. Actually my plan is to leave the tIRA alone and just convert SEP for now. That’s why I wanted to make sure I can bypass the tIRA. I already did 8606 for the nd tIRA

                            Comment


                            • #15
                              sure but you have gains in the tIRA so converting the SEP triggers prorata.

                              Comment

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