Undo proir 2014 Trad IRA contribution in favor of SEP-IRA
Julie made a $ 6,500 2014 Traditional IRA contribution earlier this year. Now at the end of the year her earnings are higher than she expected, about $100K from her LLC. She would like to set up a SEP-IRA as the only employee of her company and make a contribution of around $20K to shelter some of her earned income. Setting up the SEP gives her a higher contribution limit than the Trad IRA but it potentially makes her previous IRA contribution non-deductible. Her spouse has a SEP as a self employed carpenter but he is mostly retired and will not fund it this year. He receives about $24K in Social Security. With investment earnings, their AGI should be around $150K.
If the client’s objective is to shelter about $20K through her SEP and/or Trad IRA, can she reach that without undoing the previous 2014 Trad IRA contribution? I know you can make Trad IRA contributions in a SEP account if they are identified as such, but what about going the other way? Can the previous Trad IRA contribution in a Trad IRA account be re-characterized as a SEP contribution in some fashion?
What would be the most direct and efficient way to accomplish this goal? I appreciate any advice you can provide. Ed
Permalink Submitted by Alan - IRA critic on Tue, 2014-12-23 23:20
Recharacterization cannot be used between SEP and non SEP IRA contributions going either direction. However, if she does not make the 2014 SEP contribution until 2015, she is not an active participant with respect to the SEP in 2014, but would be for 2015. That means the existing TIRA contribution would be deductible and could remain without affecting the later 2015 SEP contribution for CY 2014. Good for MAGI up to 181k if husband covered, no limit if not. All this assumes that she is not an active participant due to some other retirement plan in 2014.