Sep IRA to roth

[GasMe]

I have a consulting side business and am paid via 1099. I contribute the maximum to a Sep IRA. In order to avoid the pro-rata rules for my backdoor Roth, can I also convert my sep-ira to a Roth each December 31 so that I have no funds residing in a traditional IRA? Thank you.

[DMFA]

Just use an independent 401(k), aka solo 401(k) or solo-k. You can open one at p much any brokerage. The maximum contribution is the same, just expressed differently: 25% of wages is the same as 20% of net profit, since the contribution isn't part of the former and is of the latter; x ÷ (1+x) = .25/1.25 = .20.

A few points: you can't contribute to SEP and 401(k) for the same employer (i.e. you) in the same year, so you need to wait until next year or remove this year's SEP contributions and earnings as "excess contributions," and your new 401(k) custodian has to allow incoming rollovers (Vanguard doesn't).

Alternatively, I think you can just do what you're proposing, but you're taxed on the conversion. I figure you'd probably rather take the deduction, though...

[jfoxcpacfp]

GasMe wrote:

I have a consulting side business and am paid via 1099. I contribute the maximum to a Sep IRA. In order to avoid the pro-rata rules for my backdoor Roth, can I also convert my sep-ira to a Roth each December 31 so that I have no funds residing in a traditional IRA? Thank you.

Click to expand...

Sure, you can do that if you want to be taxed on the annual conversion - that may be exactly what you want to achieve. However, I'd convert immediately after contributing to the SEP to start the growth inside the Roth. If the account value drops significantly, you can always recharacterize by 10/15 of the following year.

Otherwise, follow DMFA's advice and contribute to a SOLO-k instead of a SEP.