Backdoor Roth

Submitted by ROTH CONV on Tue, 2020-11-03 17:22

Client earns too much to contribute directly to Roth. Want to make non-deductible IRA contribution and convert to Roth, but they have a Simple IRA through employer that will create a prorata of basis issue. They just passed two years since their first contribution to the Simple. Client also has self-employment income. Want to “hide” Simple in an Individual K and do backdoor Roth without a pro-rata issue. Would this work? Thinking of the below steps:

1) Make sure all 2020 contributions to Simple are completed mid-December
2) Move all Simple IRA assets into Individual K and ensure $0 balance in Simple
3) Make IRA contribution
4) Convert IRA contribution
5) restart Simple contributions January 1, restart at step 1 again next December

Would this work or will we have to skip step 3 and 4 until 2021 so that client starts and ends year with $0 in IRA’s as they in theory started 2020 with money in an IRA, only converted their non-deductible contribution, and ended with a $0 begging the question of what happened to the rest……



Submitted by Alan - IRA critic on Tue, 2020-11-03 19:00

There is no concern about what happened to the SIMPLE balance, other than possibly the reason for opening a solo K in the first place. Is there any reason to open it other than to accept rollovers from the SIMPLE IRA? The easiest way to address this concern is to have a self employment gig, however small.

Submitted by ROTH CONV on Tue, 2020-11-03 20:52

Has small net income from self employment and makes small contributions to Solo K, thanks

Submitted by Alan - IRA critic on Tue, 2020-11-03 21:08

Then no problem for client to proceed as planned.

Submitted by David Mertz on Tue, 2020-11-03 21:43

[Disregard.  This concern applies to a SARSEP, not to a SIMPLE IRA plan]  Step 2 is potentially problematic.  If the employee is a highly-compensated employee as defined in section 414(q) (was a 5-percent owner at any time during the year or the preceding year, or, for the preceding year, 2019 in this case, received compensation from the business of more than $125,000, and, if the employer so chooses, was in the top 20% of employees when ranked by compensation), section 408(d)(7)(A) prohibits the distribution of amounts attributable to the employee’s salary reduction contributions for 2020, and any gains attributable to those contributions, until it’s been determined that the SIMPLE IRA plan passes the Annual Deferral Percentage test for 2020, which is unlikely to happen before the end of 2020.  However, the rest of the SIMPLE IRA balance could be rolled over the the solo 401(k) plan to minimize, but not totally eliminate, the taxable amount of the Roth conversion.

Submitted by William Tuttle on Wed, 2020-11-04 12:18

Simple IRA plans are not subject to ADP/ACP/top heavy testing. They are safe harbor by design. 

Submitted by David Mertz on Wed, 2020-11-04 13:51

Thanks spiritrider.  What I posted applies to a SARSEP, not to the SIMPLE IRA involved here.

Submitted by ROTH CONV on Thu, 2020-11-05 14:38

OK so now I have a client with an existing SEP.  They did a contribution conversion a few years ago (pre-me) and the advisor didn’t think about the SEP so they got hit with a prorata and wound up paying tax on the majority of the conversion.  So they have some basis in IRA’s……  What would happen to them if I opened a Solo K, moved their SEP into the Solo? Where would that basis wind up/how would it be tracked/could I “hide the SEP” in the Solo and do the annual non-deductible contribution/conversion?   1) Open Solo K2) Move SEP to Solo K3) Make Solo K contributions for 20204) Make IRA contribution, non-deductible, and convert to Roth5) Make all Contributions to Solo K going forward and make annual IRA contribution/Conversion 

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