Opting to not deduct SEP IRA contribution, then converting to Roth
I’ve never run into this before. Client already made contribution to SEP IRA for 2024 near the end of 2024. She wants to convert her SEP IRA to Roth IRA now. I told her she would claim a deduction for the SEP contribution in 2024, then the conversion to a Roth would be taxable in 2025 when she does it. She wants to just not claim the deduction for the SEP contribution in 2024 to avoid picking up the income in 2025 (she knows the earnings will be taxable). It seems like in theory this should work…not deducting the contribution should give her basis but I’ve never seen this done with a SEP IRA. Is there anything that precludes this from being allowable?
Permalink Submitted by Alan - IRA critic on Fri, 2025-01-10 10:19
There is no option to make a non deductible SEP contribution, although a non deductible personal contribution may be made to a SEP IRA, limited to the personal contribution limit. Any SEP contribution not deducted is an excess contribution subject to a 10% excise tax, and as an excess contribution cannot be converted as it is not eligible for rollover.
Perhaps the SEP plan supported a Roth contribution, which would have solved the problem, but it’s too late after a non Roth SEP contribution has already been made.
Permalink Submitted by Cassandra Lenfert on Fri, 2025-01-10 12:51
Interesting. Thank you for your feedback.