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  • Roth conversions, individual 401K question

    Hello everyone,

    Long time reader but rarely post. I have a variation of frequently discussed topic.

    Briefly, I have traditional IRA and SEP-IRA totaling 15200 for myself and traditional IRA totaling 11K for my wife. I don't qualify for 2017 to make any additional traditional IRA contributions due to my income; so I want to start making backdoor Roth. But of course I have to empty out all three of these accounts before I can do that. Here comes the question. I have 2 options:

    1st option: Roll over all of this into a 401K so that I don't have to pay taxes in the process of conversion. I have a vanguard individual 401K that doesn't accept these transfers. So should I use fidelity, etc? Any suggestions. Can I have 2 separate individual 401k accounts?

    2nd option: Take the hit and convert all of this into roth now. How would I do this? How much taxes would I have to pay in order to make this money into roth?

    Which of these 2 options is preferable?

     

    2nd unrelated question is: I have individual 401K; WCI often writes that the max contribution is 25% of the earnings + 18K, not to exceed 52K. But my accountant (who is good btw) says that I can only contribute 18K. I tried to tell him that this is not employer-sponsored etc, but he still keeps insisting that 18K is the max. Any help please.

  • #2
    1 is probably your only option.  My understanding is that option 2 is not possible.  $5500 per year limit into Roth accounts.  I'm interested to see what everyone else says though because I could certainly be wrong.

    Comment


    • #3




      Hello everyone,

      Long time reader but rarely post. I have a variation of frequently discussed topic.

      Briefly, I have traditional IRA and SEP-IRA totaling 15200 for myself and traditional IRA totaling 11K for my wife. I don’t qualify for 2017 to make any additional traditional IRA contributions due to my income; so I want to start making backdoor Roth. But of course I have to empty out all three of these accounts before I can do that. Here comes the question. I have 2 options:

      1st option: Roll over all of this into a 401K so that I don’t have to pay taxes in the process of conversion. I have a vanguard individual 401K that doesn’t accept these transfers. So should I use fidelity, etc? Any suggestions. Can I have 2 separate individual 401k accounts?

      2nd option: Take the hit and convert all of this into roth now. How would I do this? How much taxes would I have to pay in order to make this money into roth?

      Which of these 2 options is preferable?

       

      2nd unrelated question is: I have individual 401K; WCI often writes that the max contribution is 25% of the earnings + 18K, not to exceed 52K. But my accountant (who is good btw) says that I can only contribute 18K. I tried to tell him that this is not employer-sponsored etc, but he still keeps insisting that 18K is the max. Any help please.
      Click to expand...


      What is your employment situation?  Sole proprietor, S-corp, employed, hybrid?

      In order to have an individual 401k, you have to have self-employed earned income.  If you already are paid on 1099s, then you're good to go.  But, if you're a W-2 employee, you'd need to open up a side revenue stream.  All you need for this is to do some online surveys, apparently...I don't do them myself, but I know of several on here who have opened an indie 401k for this.  These are also known as solo-401k, solo-k, etc.  All you need for that is an EIN, which I think takes like a few minutes to do online.

      ...why do you have both a SEP-IRA and the 401k?

      You can have one 401k per unrelated employer per year.  You are not related to a W-2 employer, so you can have a separate 401k alongside it.  So if your contributions last year went into a SEP or 401k, you can have a new 401k this year.  See WCI's Multiple 401(k) Rules post.

      Fido and Schwab are probably the two most popular 401k options I know of which accept incoming rollovers.  Vanguard doesn't...silly Vanguard.  No clue why not.  You could, of course, roll that 401k into another one that does accept them.  That'd solve the issue.

      You are limited in $18,000 in elective deferrals (salary reduction) to ALL 401k and 403b accounts you have per year.  This does NOT include rollovers, and it does NOT include employer contributions.  When you are self-employed, you are both the employer and employee.

      Employee-you can only put in $18,000 across all accounts as elective deferrals, but employer-you can put in up 20% of net profits (earnings, minus expenses, minus half of self-employment tax), total not exceeding $54,000 per employer 401k in 2017 [sec 415(c)(1)(A)].  If you're an S-corp, employer-you can put in 25% of your S-corp personal W-2 earnings.  This ends up being the same amount, since earnings don't count toward employer contributions, it still comes out to 4:1 personal earnings to employer contributions ratio.  So idk if your account really is good, btw...

      Converting to Roth IRA is super easy.  You start a Roth IRA account, and you tell them your old account info, and they do a custodian-to-custodian transfer.  Takes like 5-10 minutes online.  You'll probably have to upload your old account statements.  You might have to liquidate some securities since they don't transfer all You will owe tax on your conversion.  Line 18 on form 8606 (which should equal the amount converted) will be added to your 1040 as income, since it hasn't been taxed before.

      So it seems, in order to eliminate your pre-tax IRA basis, you can either:

      • Start a new indie 401k for this year and roll your SEP and TIRA into it, keep your Vanguard 401k

      • Start a new indie 401k and roll your Vanguard 401k, SEP, and TIRA into it

      • Convert the SEP and TIRA to Roth IRA, pay tax on the converted amount as though it were income

      Comment


      • #4
        Thanks for the info. Some clarifications: I have W-2 income and 1099 income. I set up SEP IRA for 2015 and stopped contributing to it last year; in 2016, I set up and started contributing to individual 401K. I have no employer-sponsored 401K account through my W-2 employer.

        Of these 2 options:

        • Start a new indie 401k for this year and roll your SEP and TIRA into it, keep your Vanguard 401k

        • Convert the SEP and TIRA to Roth IRA, pay tax on the converted amount as though it were income


        which one is preferable? I could do the latter but would want to know how much taxes to pay before I did it.

        Comment


        • #5




          Thanks for the info. Some clarifications: I have W-2 income and 1099 income. I set up SEP IRA for 2015 and stopped contributing to it last year; in 2016, I set up and started contributing to individual 401K. I have no employer-sponsored 401K account through my W-2 employer.

          Of these 2 options:

          • Start a new indie 401k for this year and roll your SEP and TIRA into it, keep your Vanguard 401k

          • Convert the SEP and TIRA to Roth IRA, pay tax on the converted amount as though it were income


          which one is preferable? I could do the latter but would want to know how much taxes to pay before I did it.
          Click to expand...



          • Move your SOLO-k from Vanguard to another custodian (Fidelity?) then roll your SEP and TIRA accounts into your SOLO-k.

          • Start your back-door Roth per @DMFA 's instructions.


            2nd unrelated question is: I have individual 401K; WCI often writes that the max contribution is 25% of the earnings + 18K, not to exceed 52K. But my accountant (who is good btw) says that I can only contribute 18K. I tried to tell him that this is not employer-sponsored etc, but he still keeps insisting that 18K is the max. Any help please.
            Click to expand...


            Your accountant is wrong. Even good accountants can make mistakes, I've made my share. @DMFA explained how this is calculated. The max in 2017 is $54k.

          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment

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