what to do with T-IRA $ to avoid pro-rata rule

[mjdevito]

Hello,
I am about to close my SEP-IRA for my biz and change to a solo 401K.
I believe Vanguard's solo 401K:
1) allows for roll-overs, so I can roll the SEP-IRA (which is already at vanguard) into the solo 401K
2) allows for admiral shares
3) allows for Roth IRA
4) does not allow for megabackdoor roth

I want to be able to also contribute to a backdoor Roth, however, I currently have about $50K in a Traditional IRA (have not invested money into this IRA in >2yrs).

What options do I have to avoid the pro-rata rule?
1) convert the entire T-IRA ($50K) to Roth IRA and pay the long-term capital gains now?
2) ??
3) ??

Thanks for any input or thoughts.

ps - Will not be doing any of this until 2023.

[spiritrider]

If your 2023 marginal tax rate (including the possible Roth conversion) will be > 24%, ideally you would be better off if you:

1. Adopt a one-participant 401k. If you can not complete this and make an employee deferral election by 12/31/22. You can not make employee deferrals for the 2022 tax year*. If you have enough 2022 compensation to max the annual addition limit with SEP IRA contributions. This does not matter, nor does it prevent step 3.
2. If you can not complete step 1. by 12/31/22. Make make SEP IRA contributions for 2022 if you are unable to complete step 1. by 12/31/22.
3. Then rollover all pre-tax balances in all traditional SEP and SIMPLE IRA accounts into a one-participant 401k.
4. Make both 2022 and 2023 non-deductible traditional IRA contributions.
5. ASAP (it may take a few days for funds to settle) make a Roth conversion of both 2022 and 2023 non-deductible traditional IRA contributions/any additional non-deductible basis and any minimal earnings. The Roth conversion should have little to any tax liability.

*With a one-participant 401k, you have until the businesses tax filing deadline including extensions to make employer contributions. S-Corp W-2 employee deferrals must be deducted from compensation not already received with a "pay date" by 12/31. A self-employed individual has until their tax filing deadline including extensions to make employee deferrals provided step one is completed.

[bovie]

What will be your marginal federal income tax rate next year, and how old are you?

Regardless, I’d probably still suggest just converting all $50k to Roth.

But the answers to those questions will help determine whether that’s a slam dunk decision.

[mjdevito]

If your 2023 marginal tax rate (including the possible Roth conversion) will be > 24%, ideally you would be better off if you:

1. Adopt a one-participant 401k. If you can not complete this and make an employee deferral election by 12/31/22. You can not make employee deferrals for the 2022 tax year*. If you have enough 2022 compensation to max the annual addition limit with SEP IRA contributions. This does not matter, nor does it prevent step 3.
2. If you can not complete step 1. by 12/31/22. Make make SEP IRA contributions for 2022 if you are unable to complete step 1. by 12/31/22.
3. Then rollover all pre-tax balances in all traditional SEP and SIMPLE IRA accounts into a one-participant 401k.
4. Make both 2022 and 2023 non-deductible traditional IRA contributions.
5. ASAP (it may take a few days for funds to settle) make a Roth conversion of both 2022 and 2023 non-deductible traditional IRA contributions/any additional non-deductible basis and any minimal earnings. The Roth conversion should have little to any tax liability.

*With a one-participant 401k, you have until the businesses tax filing deadline including extensions to make employer contributions. S-Corp W-2 employee deferrals must be deducted from compensation not already received with a "pay date" by 12/31. A self-employed individual has until their tax filing deadline including extensions to make employee deferrals provided step one is completed.

I did max out SEP-IRA contributions already for 2022.

So, I intend to open a solo-401K at Vanguard in January 2023, then:
1) xfer all SEP-IRA $ into this solo 401k (my SEP is at vanguard, and will likely choose vanguard for the solo 401K too)
2) open a vanguard Roth IRA (or can I use the roth 401K option that I believe Vaguard's 401K has available?
3) what to do with my regular Traditional IRA $ ?? to avoid the pro-rata rule (yes, I am currently at the 24% tax bracket), and there is about $50K in the traditional IRA... but may still be worth rolling all of this over into the Roth 401K (within the solo 401K) if this is allowed? OR Roll it over into the 'regular' vanguard Roth IRA (the traditional IRA is all post-tax dollars) by the way).

* I'll be 49 yrs old in early 2023 and I'm currently in the 24% tax bracket.

Thanks for any additional feedback.

Happy holidays!