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Should I commingle IRA money?

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  • Should I commingle IRA money?

    So I have an old SEP-IRA and a Roth IRA at a particular custodian. I want to convert the SEP to a Roth but I am hesitant to mix the 2 accounts together. There is something about a 5-year rule for Roths that I don't understand very well, but I am within 5 years of age 59.5 so it could come into play. Although I don't anticipate needing to access the money until longer than that, who really knows?? So if one account was opened 2 years ago, for example, and the other one 15 years ago, and then you convert one and mix them together, what is the new 5-year set date? I hope that question makes sense.

    Option 2 would be to convert the SEP to a separate Roth, but the disadvantage to doing that is that the custodian charges a $200 fee for the closing of each account in the future. Not a huge fee, but if one of those fees can be avoided by merging them into a single account then why not? Plus a second Roth is just another account to keep track of. I have enough accounts to keep track of already and consolidating 2 into 1 would be nice.

    Also, I have a basis in the SEP of a little less than half of its current value due to many years of backdoor Roth conversions. I don't think that really matters for any other reason than calculating the taxable amount of the proposed conversion, but I might be wrong?

    Thanks for advice!

  • #2
    With one account you will just have to proportionally track the two buckets from the separate accounts.

    You are aware, the Biden/Democrat BBB as it currently stands will eliminate the ability to do Roth conversions of non-deductible basis come 1/1/2022. You really should rollover the pre-tax balances in all traditional, SEP and SIMPLE IRA accounts to a 401k, 403b or 457b by 12/31/21 and also to do a Roth conversion with little to no tax liability by 12/31/21. If you have no ability to rollover the pre-tax balances, you mist still want to do a full Roth conversions of all traditional, SEP and SIMPLE IRA accounts and pay the tax liability on the pre-tax balances.

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    • #3
      With one account you will just have to proportionally track the two buckets from the separate accounts.
      I'm not sure I understand what that means; can you please elaborate on that a little?

      You are aware, the Biden/Democrat BBB as it currently stands will eliminate the ability to do Roth conversions of non-deductible basis come 1/1/2022.
      Yes, that's exactly why I want to do it now. Also, I know that the bill will most likely undergo some changes before it's passed, but do you know if it will include both IRAs and employer-sponsored plans as it's written now?

      You really should rollover the pre-tax balances in all traditional, SEP and SIMPLE IRA accounts to a 401k, 403b or 457b by 12/31/21 and also to do a Roth conversion with little to no tax liability by 12/31/21.
      You lost me again. Why do you say with little to no tax liability for the conversion? Tax would be due on all previously untaxed amounts, no?

      If you have no ability to rollover the pre-tax balances, you mist still want to do a full Roth conversions of all traditional, SEP and SIMPLE IRA accounts and pay the tax liability on the pre-tax balances.
      This seems to contradict what you just said in the previous sentences. You're really confusing me, bro. Converting pre-tax money into Roth money always triggers tax liability, AFAIK, whether it's in an IRA or a 401/403/457. Am I wrong?? I do have a SoloK from some 1099 work I do occasionally, but I'm not sure I see the advantage of rolling the money into it, either as pre-tax or Roth money. Unless it has something to do with the bill that's going through congress.

      Why does this stuff have to be so confusing?!?


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      • #4
        Originally posted by morris View Post
        I'm not sure I understand what that means; can you please elaborate on that a little?
        If you use only one Roth IRA account, you will have to track contributions/earnings, each Roth conversion/earnings and Roth rollover/earnings.

        This is required for Form 8086 basis reporting if you take any distributions before age 59 1/2 and/or distributions exceeding your contributions before applicable 5-year rules expire.

        Yes, that's exactly why I want to do it now. Also, I know that the bill will most likely undergo some changes before it's passed, but do you know if it will include both IRAs and employer-sponsored plans as it's written now?
        As currently passed by the house, it applies to both the BDR and MBDR.

        You lost me again. Why do you say with little to no tax liability for the conversion? Tax would be due on all previously untaxed amounts, no?
        If you rollover the pre-tax balances before doing the Roth conversion. You will have removed the pre-tax balances from being reported on Form 8086 Line 6. There will only be tax liability if there is any earnings before the Roth

        This seems to contradict what you just said in the previous sentences. You're really confusing me, bro. Converting pre-tax money into Roth money always triggers tax liability, AFAIK, whether it's in an IRA or a 401/403/457. Am I wrong?? I do have a SoloK from some 1099 work I do occasionally, but I'm not sure I see the advantage of rolling the money into it, either as pre-tax or Roth money. Unless it has something to do with the bill that's going through congress.
        It is not contradictory at all. These changes prevent any conversion/rollover of after-tax assets.The basis will continue to accrue pre-tax earnings on the after-tax assets.

        You really were not doing a Backdoor Roth. It is premised on doing the Roth conversion with little to no tax liability. You should have rolled the SEP IRA to a 401k, 403b or 457b before the first Backdoor Roth conversion. Better late than never. It is a non-taxable rollover.

        That would have prevented both prorata taxation and pre-tax earnings on the resulting non-deductible basis. With this BBB change effective 1/1/2022. The non-deductible basis will be subject to pre-tax earnings and pro-rata taxation until fully withdrawn

        There is only one way with prorata tax liability and one with little to no tax liability as I have described to stop the pre-tax earnings. It is seldom a good idea to accrue pre-tax earnings on non-deductible basis. This will be the last opportunity to convert it to a Roth IRA.

        Note: O​​​​nly pre-tax traditional IRA balances can be rolled over to a 401k, 403b or 457b plan. It is never allowed to rollover non-deductible traditional IRA basis. Also, a Roth IRA can only be rolled over to another Roth IRA.

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