Doing a backdoor roth IRA while having a pre-existing sep-IRA and roth-IRA

[AY12]

Hello,
I graduated from residency recently and will be making over the income limit to contribute to the roth this year. Through Schwab, I have a pre-existing sep-IRA (from when I had a 1099 job) and roth-IRA that I had been contributing regularly too. However, I was still able to contribute some money to the roth IRA. Will I need to withdraw this money? Also, if I were to proceed to with a backdoor roth, what would I need to do with my pre-existing sep-IRA and roth-IRA.

[jfoxcpacfp]

• If your current employer’s retirement plan accepts rollovers, roll the SEP over to it, or
• If you plan to continue with 1099 work this year or in the future, set up a solo-k and r/o the SEP into it. This assumes you have not made any SEP contributions for tax year 2023, or
• If the balance is relatively low (your call as to what is “low”), roll it into your Roth IRA and be done with it.

Welcome to the forum!

[llee8820]

• If your current employer’s retirement plan accepts rollovers, roll the SEP over to it, or
• If you plan to continue with 1099 work this year or in the future, set up a solo-k and r/o the SEP into it. This assumes you have not made any SEP contributions for tax year 2023, or
• If the balance is relatively low (your call as to what is “low”), roll it into your Roth IRA and be done with it.

Welcome to the forum!

To piggyback this thread, I'm in a similar situation.
I Started to make some side 1099 income last year and opened a SEP IRA unknowingly of the complications for backdoor. Although I have a low balance <$6000.

Should I just roll it into a Roth for this year, or wait until 2024 when the secure act is in place and begin to contribute through backdoor despite my pre-existing SEP?

Thanks!

[jfoxcpacfp]

To piggyback this thread, I'm in a similar situation.
I Started to make some side 1099 income last year and opened a SEP IRA unknowingly of the complications for backdoor. Although I have a low balance <$6000.

Should I just roll it into a Roth for this year, or wait until 2024 when the secure act is in place and begin to contribute through backdoor despite my pre-existing SEP?

Thanks!

I would just roll over to Roth and dust your hands off. Market is low, balance is low, good time to do so. Just fyi, the ultimate tax impact of doing so now or waiting is pretty much the same.

However, I answered this in my above comment. Welcome to the forum!

[spiritrider]

Should I just roll it into a Roth for this year, or wait until 2024 when the secure act is in place and begin to contribute through backdoor despite my pre-existing SEP?

To my knowledge, there is nothing
in SECURE Act 2.0 that would change prorata taxation of pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. Are you sure you are not confusing this with the provision to allow Roth employer contributions. That would not effect the Roth conversion taxation of existing SEP IRA pre-tax balances.

[AY12]

• If your current employer’s retirement plan accepts rollovers, roll the SEP over to it, or
• If you plan to continue with 1099 work this year or in the future, set up a solo-k and r/o the SEP into it. This assumes you have not made any SEP contributions for tax year 2023, or
• If the balance is relatively low (your call as to what is “low”), roll it into your Roth IRA and be done with it.

Welcome to the forum!

Thanks for the response! I appreciate it.

I'm currently at a W2 job right not (part time) and am planning to contribute to my 401K for the full amount to save in taxes (I'm in CA). I will probably pick up a 1099 job later in the year. To save on taxes, would you consider out max-ing out on SEP-IRA contributions when I start this job? Or would it be more beneficial to fund a "backdoor roth"? Would you also recommend an S corp to save on payroll taxes?

[jfoxcpacfp]

• I would recommend a solo-k, not a SEP.
• A backdoor Roth and a solo-k are not mutually exclusive, you can do both
• NO to s-corp, given the facts presented.

[AY12]

• I would recommend a solo-k, not a SEP.
• A backdoor Roth and a solo-k are not mutually exclusive, you can do both
• NO to s-corp, given the facts presented.

Thank you. Is the reasoning for the solo-K over the SEP so that I can do a backdoor roth?

Also, why no to s-corp? I heard that could save a lot in taxes?

[AY12]

I also forgot to mention I have a traditional 401K at my W2 job now and was planning to contribute the max to it cuz I am high income and in california to lower my marginal tax rate. Should I still do the solo-K over the SEP for the 1099 job?

[JBME]

no question, yes you should do solo-401k instead of SEP

[spiritrider]

Thank you. Is the reasoning for the solo-K over the SEP so that I can do a backdoor roth?

Yes

Also, why no to s-corp? I heard that could save a lot in taxes?

Not necessarily. After paying yourself "reasonable" compensation, you will save FICA taxes on distributions. However, there are facts & circumstances where an S-Corp can be counter-productive:

• All W-2 employer's, including an S-Corp are required to deduct/pay Social Security (SS) taxes up to the SS maximum taxable earnings (MTE, 2023 = $160,200).
• While a credit the SS excess employee 6.2% share is available on your tax return. The employer 6.2% share is not.
• If your W-2 SS wages + 92.35% of your 1099 business profit is > the SS MTE, you will pay more in net FICA taxes that you would SE taxes as a sole proprietor.
• An S-Corp has additional costs/fees/taxes (legal, accounting, payroll, state incorporation, annual reports, etc..) amounting to thousand$.
• Of special note, CA has a 1.5% franchise tax on S-Corp distributions.
• An S-Corp's 401k employer contributions are limited to 25% of compensation. While a sole proprietor's employer contribution can be 20% of their full self-employed earned income.
• If you are eligible for the QBI deduction, an S-Corp's base QBI is limited to their distributions. While a sole proprietor's base QBI is limited to their self-employed earned income.
• Don't forget the general hassle factor of having an S-Corp.

Every set of facts and circumstances should be modelled, but @jfoxcpacfp's knowledge and experience weighs that an S-Corp is not likely beneficial in your circumstances.

[AY12]

Also, if I have a 401K from my W2 job and start a solo-401K from my 1099 job, how should I distribute the contributions to both accounts?

[jfoxcpacfp]

Also, if I have a 401K from my W2 job and start a solo-401K from my 1099 job, how should I distribute the contributions to both accounts?

Sorry, I don’t understand the question.

[spiritrider]

The OP might be asking how to handle the employee deferral* and annual addition** limits. There are few hard and fast rules, but here are some considerations:

• Employee deferrals should be made to a primary employer plan up to any match
• Employee deferrals should generally be maximized to a primary employer plan if made to a one-participant 401k would cause annual addition limitations
• If eligible for the QBI deduction, pre-tax one-participant 401k contributions reduce QBI. It might be better to make any one-participant 401k employee deferrals to a designated Roth account.

*Employee deferral limit = $22,500 (2023)
**Annual addition limit = the lessor of the statutory limit = $66,000 (2023) and 100% of compensation.

[AY12]

I was just wondering if I should contribute the limit to the employer sponsored 401K (22,500), which means all I can contribute to the solo-401K is the profit sharing component. Or should I split the employee contribution 50/50 between the employer 401K and the solo 401K?