Back door Roth and SEP contribution in the same year

Home Fairmark Forum Retirement Savings and Benefits Back door Roth and SEP contribution in the same year

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  • #7383
    Bruce1950
    Participant

    Hello
    A friend has no TIRA and her MAGI exceeds the single Roth contribution max, so would like to do a back door Roth. She has no existing SEP or SIMPLE IRAs. No problem, I told her. But she is self employed and I figured she can contribute $35,000 to a SEP for the same year, which she wants to do.

    Question: does the SEP balance at the end of the year mean that she has to pro-rate the amount of the back door Roth conversion?

    Looking at Part I of the 8606 it appease she does. The three bullet point conditions at the beginning of Part I on who must complete part I, includes “You made non-deductible contributions to a TIRA for the year”, which she in fact has. And it would seem the timing during the year would make no difference.

    Working through Part I with a $7,000 after tax contribution to the TIRA and adding $35,000 to SEP for 2020, working through the 8606, this means about 16.7%, or only $1,167 of the $7,000 would be converted without tax…the remainder would be income.

    Do you agree?

    If so, would it matter if the SEP contribution for 2020 were made in 2021, because I believe the individual has up until Oct 15 to make the SEP contribution for the previous year.

    Thanks

    BruceM

    • This topic was modified 1 year, 2 months ago by Bruce1950.
    • This topic was modified 1 year, 2 months ago by Bruce1950.
    #7392
    Alan S.
    Participant

    Yes, the pro rating done on Form 8606 will result in most of the conversion being taxable if she has this SEP balance on 12/31/2020. As you indicated, she can avoid the tax by making the 2020 SEP contribution in 2021 by the due date or by the extended due date of 10/15 if she files a timely extension for her 2020 return. If she has not made a 2019 contribution, she also has 2 days to make that ND contribution in addition to the 2020 contribution she will make. She could then convert them in a single 14k tax free conversion. Of course, once she does fund the SEP IRA, that will compromise future back door Roth conversions after this year. One solution is to fund a solo K instead of the SEP IRA since that will eliminate the pro rating issues as well as the potential for a larger contribution than she could make as a SEP contribution. In addition, starting with 2020 contributions, a solo K can be established later than in the past. For 2020 contributions the solo K only needs to be established by the due date plus extensions for filing the 2020 return, so there is plenty of time to consider this.

    #7431
    Bruce1950
    Participant

    Thanks Alan. As I thought

    BruceM

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