What to do with Traditional IRA I am stuck with?

[joeblo]

I am a partner in an LLC for which I max out my 401K each year. I have recently (THANK YOU DR. DAHLE/WCI) become aware of the backdoor ROTH IRA conversion which I am in process of utilizing for my wife (homemaker) this year via Vanguard. I have a small ($40K) traditional IRA myself from a previous SEP-IRA rollover.  My current 401K plan does not accept rollovers and as such I am unable to perform a ROTH IRA conversion which I have recently become aware of (THANK YOU AGAIN DR. DAHLE/WCI).

So my question is ... am I just stuck making an after-tax (currently $5500 nondeductible) contribution to my current IRA for the next 20 years that I have to practice or is there somewhere I can move/exchange this current traditional IRA such that I can then make make yearly after-tax (nondeductible) contributions which I can then convert to ROTH IRA's?  TIA !!!

[DMFA]

joeblo wrote:

I am a partner in an LLC for which I max out my 401K each year. I have recently (THANK YOU DR. DAHLE/WCI) become aware of the backdoor ROTH IRA conversion which I am in process of utilizing for my wife (homemaker) this year via Vanguard. I have a small ($40K) traditional IRA myself from a previous SEP-IRA rollover.  My current 401K plan does not accept rollovers and as such I am unable to perform a ROTH IRA conversion which I have recently become aware of (THANK YOU AGAIN DR. DAHLE/WCI).

So my question is … am I just stuck making an after-tax (currently $5500 nondeductible) contribution to my current IRA for the next 20 years that I have to practice or is there somewhere I can move/exchange this current traditional IRA such that I can then make make yearly after-tax (nondeductible) contributions which I can then convert to ROTH IRA’s?  TIA !!!

Click to expand...

Rollover traditional IRA into a 401(k) which accepts incoming rollovers.

Since you had a SEP in the past, then you must have been self-employed in the past, right?  To open an individual 401(k), I believe all you need was self-employment income in a prior year, not necessarily the current one.  Otherwise just start a survey-taking business, earn any positive amount of money, and start the 401(k) for that.  Be aware that Vanguard does not allow for incoming 401(k) rollovers.

[spiritrider]

DMFA is correct if the SEP IRA was from a sole proprietorship. The key is that you would have to have been self-employed, but not through a partnership. Even though partners are considered "self-employed" for income tax purposes. They are considered employees of the partnership which is the employer for retirement plan purposes.

26 CFR 1.401-10 - Definitions relating to plans covering self-employed individuals, (e) Definition of employer, (1)

For purposes of section 401, a sole proprietor is considered to be his own employer, and the partnership is considered to be the employer of each of the partners. Thus, an individual partner is not an employer who may establish a qualified plan with respect to his services to the partnership.

[Hatton]

DMFA and spiritrider  this is new info for me!  It sounds like you are saying that I could open up a solo-k at Fidelity or Schwab since I am solo and roll the 2 IRAs I have into it (1.8 mill) because of having a history of solo employment.  I was funding the retirement of several employees prior to going part-time however.  I am currently funding an IRA for myself only.  I always assumed with employees you can't do this.  I have never done a backdoor roth because of the prorata rule.

[spiritrider]

It is not clear from your post what your exact circumstances are.

Someone who is a "self-employed Individual" with no "eligible employees" other than a spouse, can adopt a one-participant (AKA Solo) 401k.

A self-employed Individual is someone who is taxed as a sole proprietor and has earned income from such self-employment in the current or any prior year. A partner does not qualify.

IRS allows eligible employees to be restricted to those employees >= 21 or with >= 1 year of service of > 1,000 hours/year. Note: Vanguard does not allow this restriction in their Individual 401k.

So what matters is what employees you do or do not have and their work schedules not yours. This for all businesses you 100% own or are part of a controlled or affiliated service group.

[joeblo]

I am an Anesthesiologist partner (LLC) with 14 CRNA employees.  We are all covered by our current 401K which I add to above the amount given by the company and therefore maxing it each year. I receive a K-1 for tax purposes each year.  It sounds like I WOULD NOT be eligible for a solo401 k.

[spiritrider]

You are correct. You are not eligible to open a one-participant 401k as a partner.

However, as DMFA pointed out, if you could earn just a little on the side as a sole proprietor you could adopt a one-participant 401k (not Vanguard) and rollover your pre-tax IRA assets. Note: I'm a little more conservative than WCI. I believe this should be a "trade or business with the intent to make a profit" and at least have enough business profit ($500+) to pay SE taxes.

This is assuming that you do not have >= 80% ownership in the partnership and either alone or through attribution rules of a spouse are not in any other controlled group or affiliated service group.

[LizOB]

joeblo wrote:

I am a partner in an LLC for which I max out my 401K each year. I have recently (THANK YOU DR. DAHLE/WCI) become aware of the backdoor ROTH IRA conversion which I am in process of utilizing for my wife (homemaker) this year via Vanguard. I have a small ($40K) traditional IRA myself from a previous SEP-IRA rollover.  My current 401K plan does not accept rollovers and as such I am unable to perform a ROTH IRA conversion which I have recently become aware of (THANK YOU AGAIN DR. DAHLE/WCI).

So my question is … am I just stuck making an after-tax (currently $5500 nondeductible) contribution to my current IRA for the next 20 years that I have to practice or is there somewhere I can move/exchange this current traditional IRA such that I can then make make yearly after-tax (nondeductible) contributions which I can then convert to ROTH IRA’s?  TIA !!!

Click to expand...

2 options- find a 401k that will accept the rollover (discussed above), or convert to Roth now and pay tax on the conversion. If you have pre-tax money in the tIRA you'd have to pay tax on the whole thing, if post-tax (because you made too much to deduct the contribution) you only pay tax on the earnings. $40k is small enough that if you are early in your career it may be worth it to pay the tax if the 401k option doesn't work out, to open up Roth space for the next few decades.

If you cannot deduct your tIRA contributions, don't use the tIRA (except to convert to Roth the next day). When you sell, the growth is taxed as regular income. Open a taxable account instead- also post-tax contributions, but growth taxed at long term capital gains rates (much lower than regular income)

[jfoxcpacfp]

hatton1 wrote:

DMFA and spiritrider  this is new info for me!  It sounds like you are saying that I could open up a solo-k at Fidelity or Schwab since I am solo and roll the 2 IRAs I have into it (1.8 mill) because of having a history of solo employment.  I was funding the retirement of several employees prior to going part-time however.  I am currently funding an IRA for myself only.  I always assumed with employees you can’t do this.  I have never done a backdoor roth because of the prorata rule.

Click to expand...

I am confused by your information, also. By saying "I was funding the retirement of several employees prior to going part-time...", does that mean that you are no longer an employer and strictly a sole proprietor/LLC/s-corp with no current employees? I think this may be what @spiritrider was alluding to.

[litovskyassetmanagement]

joeblo wrote:

I am a partner in an LLC for which I max out my 401K each year. I have recently (THANK YOU DR. DAHLE/WCI) become aware of the backdoor ROTH IRA conversion which I am in process of utilizing for my wife (homemaker) this year via Vanguard. I have a small ($40K) traditional IRA myself from a previous SEP-IRA rollover.  My current 401K plan does not accept rollovers and as such I am unable to perform a ROTH IRA conversion which I have recently become aware of (THANK YOU AGAIN DR. DAHLE/WCI).

So my question is … am I just stuck making an after-tax (currently $5500 nondeductible) contribution to my current IRA for the next 20 years that I have to practice or is there somewhere I can move/exchange this current traditional IRA such that I can then make make yearly after-tax (nondeductible) contributions which I can then convert to ROTH IRA’s?  TIA !!!

Click to expand...

If you are a partner in an LLC with a 401k plan, there is no reason at all you can not amend the plan document to allow incoming rollovers.  Unless I'm missing something, amending the plan document would be the first thing to do.  I'm yet to see a small practice 401k plan that does not allow incoming rollovers, so first thing to do is to check the plan document yourself, and then talk to the TPA about amending it.  Who is the plan service provider/TPA/record-keeper?

[joeblo]

Kon ... I will be calling our plan service provider tomorrow.  I remember amending the plan a few years ago such that I could invest outside of TRowePrice via Charles Schwab, so hopefully we can just amend it additionally.  Thanks. I will follow up with his comments.  I really am trying to keep this money fully intact without paying any conversion penalties or fees and your suggestion really is the simplest to just let me get rid of this so that I will then have a new trtaditional IRA to put AFTER tax dollars into yearly and then backdoor convert to ROTH.

[litovskyassetmanagement]

joeblo wrote:

Kon … I will be calling our plan service provider tomorrow.  I remember amending the plan a few years ago such that I could invest outside of TRowePrice via Charles Schwab, so hopefully we can just amend it additionally.  Thanks. I will follow up with his comments.  I really am trying to keep this money fully intact without paying any conversion penalties or fees and your suggestion really is the simplest to just let me get rid of this so that I will then have a new trtaditional IRA to put AFTER tax dollars into yearly and then backdoor convert to ROTH.

Click to expand...

A TRowePrice plan, not a big surprise.  Having a plan with a large mutual fund company with really expensive funds and high administrative costs is probably not the best idea for high earning doctors. I've seen several of their plans, and you can do a lot better than TRowePrice in terms of cost and investment choices (and then you won't need to open outside brokerage windows). And outside of the plan brokerage windows can be a huge mess if they are not opened from within the plan - my article on the topic would be published by WCI in a couple of months.  For one thing, improperly titled brokerage can be subject to creditor claims even though it is supposedly a part of an ERISA plan.  That's just for starters.  If the practice has non-HCE staff, this can create fiduciary issues because if staff is stuck in the TRowePrice expensive fund menu and docs can go out to open brokerage accounts (and it is proven that staff did not get this choice in writing or got education on how to do it) then the partners are breaking their fiduciary duty to make sure that the plan is run in the best interest of all plan participants.

[joeblo]

THANK YOU KON ...

I called my plan advisor yesterday who confirmed that my current 401K DOES accept rollovers.  He called and verified such with TRP also. Apparently TRP does not have the specifics of 401K plans who have 3rd party administrators as we do.  The original TRP rep I spoke to should have referred me to my 3rd party administrator when I asked if my plan accepted rollovers, but instead the TRP rep mistakenly simply said my plan does not (accept rollovers). Therefore today I have started the process to roll this IRA into my 401K ... which will then open the door for me to perform back door IRA's since I will have "no other" IRA plan.

THANKS KON AND DAHLE/WCI