Is SEP IRA value included in Roth IRA Conversion Equation
I have a client who will be starting as an independent contractor next year. Because he did not have an IRA in the past he has been contributing to a non-deductible IRA every year and converting to a Roth IRA. (He makes too much to contribute to a Roth IRA directly)
My question is, if we were to rollover his current 401K balance of roughly $500K into a SEP IRA would that balance have to be included as IRA assets for the Roth IRA conversion? Would this effectively make his $5,500 contribution to the IRA and the subsequent conversion to the Roth almost 99% taxable?
Thank you in advance. Your help is greatly appreciated.
Permalink Submitted by Alan - IRA critic on Tue, 2014-12-16 17:04
Yes, the value at year end of any non Roth IRAs (TIRA, SEP or SIMPLE) is included on line 6 of Form 8606, and will make the conversions almost fully taxable. He could leave the 401k where it is and avoid this problem.
Permalink Submitted by Kasey Gahler on Tue, 2014-12-16 17:14
Thank you Alan. I appreciate the quick response. That is what I thought, but wanted to make sure. If we were to open up a solo 401K/PS plan for him instead I am assuming that would also be OK. Is that correct?
Permalink Submitted by Alan - IRA critic on Tue, 2014-12-16 17:16
Yes, correct.