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question on conversion of SEP IRA and IRA to start backdoor Roth

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  • question on conversion of SEP IRA and IRA to start backdoor Roth

    I'm finally going to take the plunge and start a backdoor Roth this year, but I have a problem that I have no idea how to solve. I have 2 IRAs from several years ago, a SEP IRA with about 200K and a general IRA with about 40K. To avoid paying taxes now, I can just roll my SEP IRA into my existing 401K, easy. The problems I have is my other IRA. Before becoming educated on finance through this site and others, I started an IRA with after tax money several years ago, not a huge deal I guess since it has roughly doubled since I started it. The problem I have is how to get rid of it so that I can start my backdoor Roth? I assume I can't roll it into the 401K, since half of it (the contribution) has already been tax, and I obviously don't want to pay tax on that half again when I take it out of the 401K at retirement. I also don't want to pay taxes now on the other half (earnings) of the IRA by closing it and cashing it out. Any suggestions?

  • #2
    Simple. Conversions are pro rata, but the IRS considers rollovers from IRAs to non-IRA plans to first come from pre-tax assets.

    Rollover the total pre-tax balances in all traditional, SEP and SIMPLE IRAs to the 401k.

    What is left is the non-deductible basis which can now be converted to a Roth with little to no tax liability.

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    • #3
      So I can convert all of my previous after tax non-deductible contributions from the SIMPLE IRA to a Roth also?

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      • #4
        You only mentioned a traditional IRA with non-deductible contributions and a SEP IRA.

        Where did this SIMPLE IRA come from and how did any non-deductible contributions get in it? All contributions to a SIMPLE IRA are deductible.

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        • #5
          Oh, sorry, didn't mean SIMPLE IRA, just SEP IRA and non deductible IRA

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          • #6
            Yes, this is actually very easy to fix, and you can even do contributions for 2017 if you haven't already.

            1. Make non-deductible contribution for 2017 (and 2018 too, may as well)

            2. Convert to Roth an amount equal to non-deductible basis in Traditional IRA

            3. Rollover remainder of Traditional IRA and SEP IRA to 401(k) before 12/31/2018 [or do this first if you so choose; it still works]


            ...I think we've literally answered this question, like, three times tonight :-)

             

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            • #7
              Maybe I'm missing something, but what I'm concerned about is mixing deductible and non deductible IRAs into my rollover 401k. Will this be a problem when I start withdrawing, since the non deductible IRA contribution portion has already been taxed, and the rest has not?

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              • #8




                Maybe I’m missing something, but what I’m concerned about is mixing deductible and non deductible IRAs into my rollover 401k. Will this be a problem when I start withdrawing, since the non deductible IRA contribution portion has already been taxed, and the rest has not?
                Click to expand...


                I'm sorry, but you're not getting it.

                You haven't rollover'd deductible and non-deductible IRA money into a 401(k). Actually, you *can't* even rollover non-deductible money into a 401(k) or any qualified plan. That's not allowed.

                Only the non-deductible *contributions* are what is non-deductible. Their growth is pretax just like the rest. That non-deductible basis is static; its amount doesn't increase. You should know exactly how much that amount is since it's the amount you contributed and it should have been tracked every year on Form 8606; everything left is the pretax growth.

                Rollover the pretax growth to the pretax 401(k) and convert the non-deductible basis to Roth, and everything's good. As long as:

                • You convert an amount equal to the non-deductible basis to Roth (meaning there's nothing deductible converted, and nothing non-deductible to rollover to the 401k), and

                • You rollover the remainder of the Traditional IRA (pretax money, which is all growth and deducted contributions) to the 401k, meaning there is $0 left in all Traditional, SEP, and SIMPLE IRAs on 12/31 of the year of the conversion (in this case, 12/31/2018)


                ...then everything pretax ended up in pretax, and everything post-tax ended up in post-tax, and there's no additional tax due on anything.

                Capisci?

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                • #9
                  Ohhhh, now that makes sense, thanks!

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