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SEP IRA 2021, Backdoor Roth 2022?

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  • SEP IRA 2021, Backdoor Roth 2022?

    hi! attempting to make some last minute tax decisions regarding opening up a SEP and would love to hear other's thoughts/opinions.

    here is a little breakdown. we did not properly plan for this at the end of 2021, so i'm aware we are limited in options as to what accounts we can still open, etc.

    1) both my husband and I have both W2 and Self Employed Income, our taxable income exceeds the ROTH limit.
    2) we both have rollover IRA accounts/balances (and it's too late to clear those to 0 as the deadline to do so was 12/31).
    3) setting up & contributing $3500 to a SEP IRA for my husband decreases our tax liability for 2021 by $1K (this is the max we can contribute for 2021)
    4) next year I am hopeful we can rollover his SEP to his employer 401K (bringing the balance to 0) and consolidate his other rollover IRA accounts into his employer 401K as well to clear those balances to 0 to circumvent the pro-rata issue. (Is consolidating multiple old IRA accounts favorable for any other purpose?). I'd like to set up a solo 401K for him to use going forward instead of the SEP, but just want to open some kind of tax-advantaged account to receive a tax break for 2021.
    6) i'd like to start performing the back door roth in 2022 tax year for both of us (12K). it seems like a hassle to attempt the back door roth conversion for 2021 since the pro-rata rules will apply and we will likely be in a lower tax bracket in 2022 due to some extra one-off income in 2021.

    I was just curious if opening the SEP this year is worth it or if it will create far too much hassle when trying to do the back door next year. any insight / comments / suggestions welcome! thank you!

  • #2
    Welcome to the forum! The good news is that you have until 10/15/22 to open and fund a solo-k for each of you, same as SEP, and contribute the same amount as you would contribute to the SEP. Then roll those pre-tax TIRAs into the solo-k's...you have until 12/31/22 to avoid pro-rata taxation if you make backdoor Roth conversions in 2022. That would be my recommendation.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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