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Prorata, SEP IRA, i401k, backdoor roth HELP!

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  • Prorata, SEP IRA, i401k, backdoor roth HELP!

    Help! So I’m new to retirement accounts. EM IC currently. Just recently became full time IC from a W2 last year. I’ve been trying to read on WCI, but it seems like I can’t get read fast enough. I was trying to do everything correctly and even called Vanguard to have them walk me through it, but I think I messed up.


    So I just started putting money into retirement in June 2020. I have a TIRA and roth for both myself and husband (stay at home dad). I previously (prior to April 2020) was a W2 and hadn’t had anything put into retirement. I had a IC job prn. So in June 2020 I put in about $9,000 into a SEP IRA (for the 2019 tax year since there was an extension) to decrease my tax burden. This was my first time ever really putting money into a retirement acoount. I had about $100 in my roth when I opened it in Residency.


    In July 2020 I put $6,000 into my TIRA and $6,000 into my husband’s TIRA and did a backdoor roth. I did this because I thought I was doing it for 2019, but I know now that is not the case. So in reality I did it for 2020. I did it with a Vanguard rep walking me through it to AVOID the prorata rule, but I think that failed.


    NOW I know I should just have a i401k (which I don’t have).


    How do I fix this? I’ve been reading non-stop, but am afraid of making yet another mistake. I’m trying NOT to get a financial advisor because of the advice not to on here. I do have a CPA who is looking into it as well. I’m just really anxious and wanted advice from you all.


    The only other thing that adds a wrench in the situation is a still need to put in $57,000 into my SEP IRA for 2020 to decrease my tax burden for 2020 (I’m full time IC now). I paid my quarterlies with the assumption I’d max out my SEP IRA for 2020.


    So as of now I was thinking of maxing out my SEP IRA for 2020 with the $57,000 (since I have until April 15, 2021 to do so), pay taxes for the pro rata rule, open a i401k with Etrade or ameritrade this year (2021) and roll over my SEP IRA into my i401k and keep my TIRA/ROTHs at vanguard. I know I can’t open a i401k at Vanguard and roll over my SEP.


    I also read about converting all of your SEP IRA into a Roth and paying taxes? My SEP only has about $9,000 (currently, but remember I still need to put in $57,000 for 2020). I’m just trying to come up with the best way to fix this and not make more mistakes. I’ haven’t put the $57,000 in yet until I can figure out how to avoid more mistakes. I know now I shouldn’t have opened a SEP and should have started with a i401k, but that ship has sailed. I just need to try and fix it now. Thank you all! I really appreciate it. I know this has been brought up alot before, but it was 2017/2018 and I just wanted to make sure after reading those cases I have the right idea.

    -Newbie

  • #2
    You don't need a FA for this (although "because of the advice not to on here" is really not a good reason to make that decision. ugh.) Your CPA should be able to clean this up without your our our advice. If that is a problem, you need to find a CPA more experienced in these matters.

    Now, to answer your question, your CPA will file Form 8606 with your 2020 tax return. You'll owe some pro-rata tax. Not a big deal. Then you WILL NOT contribute to a SEP for 2021 but, instead, open a solo-k, r/o the SEP, then close it and commence with the solo-k. You are stuck with 2020, but not a big deal at this point. This is an affirmation of your para 3.

    If your CPA was involved in any of these previous decisions, this is a problem of his/her making. See advice in 1st para.
    Last edited by jfoxcpacfp; 01-16-2021, 09:20 AM. Reason: added close parentheses
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Should I still put in the $57,000 into my SEP for 2020? I was planning on doing that before april 2021 to decreased tax burden, but not sure if that increases what I owe for pro rata.

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      • #4
        Originally posted by ngersdor View Post
        Should I still put in the $57,000 into my SEP for 2020? I was planning on doing that before april 2021 to decreased tax burden, but not sure if that increases what I owe for pro rata.
        1. This won't increase the pro-rata tax.
        2. Even if it would, I w/n consider that a good reason not to max the contribution.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          If you have not made any 5305-SEP IRA contributions for* the 2020 tax year, you can now** adopt a one-participant 401k by your tax filing deadline including extensions and make employer contributions.

          Therefore, you can make the $57K in employer contributions to the one-participant 401k. This does not affect the 2019 pro-rata Roth conversion caused by pre-tax balances in all traditional, SEP and SIMPLE IRA accounts on 12/31/2019.

          However, once you adopt the one-participant 401k (anywhere else but Vanguard) you can rollover all pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. This will allow future tax efficient Backdoor Roths with little to no tax liability.
          *5305-SEP IRA contributions for 2019 made in 2020 do not matter.

          **Under the SECURE ACT, effective with the 2020 tax year. The 401k adoption deadline changed from 22/31 to the businesses tax filing deadline including extensions.

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          • #6
            yeah I echo above. No big deal to be under the pro-rata rule for the 2020 backdoor Roth. max out your SEP before the tax deadline of April 15th 2021, open up a solo 401k, roll your sep-ira money into the solo401k, then start contributing to your solo401k if you have consistent income. If your 1099 income is not consistent, might have to wait to make sure you can max it out, and you don't want to overcontribute.

            And you can do the backdoor Roth for 2021 at anytime this year as by Dec 31st of this year, 2021, you will have not money in any sort of IRA and no pro-rata rule

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            • #7
              Originally posted by racelari View Post
              max out your SEP before the tax deadline of April 15th 2021, open up a solo 401k, roll your sep-ira money into the solo401k, then start contributing to your solo401k if you have consistent income.
              As I pointed out, SEP IRA contributions for 2020 are no longer necessary.

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              • #8
                Originally posted by spiritrider View Post
                As I pointed out, SEP IRA contributions for 2020 are no longer necessary.
                And that is a very good point as I, too, misread the $9k SEP contribution as being for 2020 and I now see it says 2019! As always, appreciate the safety net of your comments.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  So it sounds like I didn't mess up. No pro rata. Ooen up a new i401k for 2020 and max out. Then roll over sepira and close it and done! Then after all that do the traditional ira contributions and back door roth for 2021.

                  Right?

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