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  • Backdoor ROTH mishap

    I am a new WCI convert and a financial newbie who got excited about the backdoor ROTH. I am the CFO of our family unit and my husband wears the white coat. Currently he has a "regular employee job" where he contributes to a 401K an and "independent contractor gig" where he contributes to a SEP IRA. I just learned about the backdoor ROTH and in my excitement to make it before tax deadline 2016 made a contribution to an IRA and rolled it into a Backdoor Roth. In the wee hours of the morning I noticed my error and misunderstanding. I wanted to confirm: 1) I can reclassify this back into a traditional IRA by October 15th without tax penalty? 2) It makes sense for us to keep the SEP (saving around $20,000 a year pretax)rather then switching to a solo 401K (due to his employer sponsored 401K) the backdoor ROTH will just be off the table for him?

     

    Thanks for the clarification!

  • #2




    I am a new WCI convert and a financial newbie who got excited about the backdoor ROTH. I am the CFO of our family unit and my husband wears the white coat. Currently he has a “regular employee job” where he contributes to a 401K an and “independent contractor gig” where he contributes to a SEP IRA. I just learned about the backdoor ROTH and in my excitement to make it before tax deadline 2016 made a contribution to an IRA and rolled it into a Backdoor Roth. In the wee hours of the morning I noticed my error and misunderstanding. I wanted to confirm: 1) I can reclassify this back into a traditional IRA by October 15th without tax penalty? 2) It makes sense for us to keep the SEP (saving around $20,000 a year pretax)rather then switching to a solo 401K (due to his employer sponsored 401K) the backdoor ROTH will just be off the table for him?

    Thanks for the clarification!
    Click to expand...


    Good for you! You did the right thing by contributing to the TIRA before 4/18, as that has no pro-rata tax implications. Yes, your hubby can have a SOLO-k for his side business and make the same amount of contribution that he can in the SEP. You don't even have to recharacterize the Roth conversion. As long as the SEP is moved into the SOLO-k by 12/31/17, you'll be just fine. So, next steps are:

    • Set up a SOLO-k for your husband's business.

    • Roll the SEP balance into the SOLO-k (this can be after he contributes the maximum amount for 2016).

    • Make sure the SEP has a zero balance on 12/31/17.

    • DO NOT make a SEP contribution for 2017. You cannot use 2 different plans for the same business in the same year.


    Going forward, I can think of 2 reasons you might want to keep the SEP active rather than the SOLO-k:

    1. Cash flow - if you want to have the extra 9-1/2 months to contribute to the SEP, and/or

    2. Administration of the SOLO-k. Once the balance reaches $250k, you'll have to file a form 5500-EZ. No such filing is required with the SEP. The 5500-EZ is actually quite simple, so this should not be a deterrent.


    Should you decide to stick with the SEP, just make sure to roll the balance over each year before 12/31. Then you are free to take advantage of the backdoor Roth maneuver annually. You realize you can also have a spousal Roth, too, right? You'll just have to do the "2-step", also.

    This post may help: Explaining Backdoor Roth IRAs.

    One last clarification - you have until 10/15/2018 to recharacterize (the extended due date for the current tax year). It's just not relevant for your situation.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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