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Confused re: SEP IRA and Regular IRA contribution - to MEGA backdoor ROTH.

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  • Confused re: SEP IRA and Regular IRA contribution - to MEGA backdoor ROTH.

    Hello all of you smart people out there. I have a (good) dilemma and need some advice. I know I will take all advice given with a grain of salt. Here is my dilemma:

     

    I have both W2 and 1099 income. I currently have a fully converted account to only ROTH IRA with no leftover traditional IRA or SEP IRA money.  I want to contribute to my SEP for the 2017 year (25% of my 1099 income, which amounts to about $6000), which I then want to convert to ROTH, and I want to contribute to a nondeductible IRA ($5500), which I also want to convert to a ROTH.    Am I allowed to do this, with contributions from both incomes?    On a side note, is this advisable to maximize retirement savings? I am currently in the highest tax bracket.

  • #2
    Since you are in the highest tax bracket, you may want to rethink your strategy.

    As I am sure you know, if your tax bracket doesn't change over your lifetime, deciding to Roth or not is a moot point.  If there is a chance you will have a lower bracket in the future, you want to defer as much as possible.

    I am guessing that you are already maxing out your 401k contribution pre-tax.  If you aren't, do this first.  Also, if you have an HSA account make sure you max it out as well.

    The SEP funds will be included with a non-deductible contribution in the pro-rata rule when you do a conversion.

    If instead, you opened a solo 401k, you could still put away 20 or 25% (20% would be due to self-employment tax) of the 1099 income.  These funds could then grow pre-tax while you continue to make your annual non-deductible contributions to the IRA and convert to Roth.

    You would need to open a solo 401k before 12/31/17 in order to make contributions for 2017.  You need to fund the account by the tax filing deadline for your 2017 taxes.  Most major custodians offer solo 401ks.

    Happy Holidays.

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    • #3
      Open an individual 401k now ("not tomorrow, not after breakfast...now") and roll your SEP money into your i401k.  Then do the backdoor Roth.  Otherwise you'll pay tax at your marginal tax rate x (5500/5500+SEP funds).  That's the pro rata concept. 401ks aren't includuded, SEPs are.  You don't have a lot of time to do this.  Fidelity allows roll overs and has worked quickly in my experience.  Theirs is called a Keough plan but it's the same thing.  I would not suggest doing a Roth conversion with your SEP/401k funds now.  Tax bracket too ************************ high.

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      • #4


        I want to contribute to my SEP for the 2017 year (25% of my 1099 income, which amounts to about $6000), which I then want to convert to ROTH, and I want to contribute to a nondeductible IRA ($5500), which I also want to convert to a ROTH.    Am I allowed to do this, with contributions from both incomes?
        Click to expand...


        As others have stated, you need to set up a solo-401k rather than a SEP, which is just an employer form of IRA. You'll be able to do the backdoor Roth without the prorata rule coming into plan with the 401k.

        You will be able to contribute 20% of net profits from your side gig (the 25% limit is for W2 income but they both come out to the same amount). You'll have until the due date of your income tax return, including extensions, to contribute but you must set up the 401k by 12/31/17. This is important because you won't be able to figure out how much you can contribute until you know the net profits via preparation of your 2017 income tax return.


        On a side note, is this advisable to maximize retirement savings? I am currently in the highest tax bracket.
        Click to expand...


        Sure. No need to r/o the 401k into a Roth and pay the taxes, though.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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