Post 70 1/2 contributions to solo 401(k) with Conversion
I have a client that is now 73 years old. He is currently working, earning approximately $25k per year. From what I read, there should be no issue with him setting up a solo 401(k) and making contribution of at least $23k, with the one caveat that he will need to make RMDs on the account.
Here is the follow-up question. Is there any reason that he could not convert that solo 401(k) account to a Roth IRA account? He currently is doing nothing and I am anticipating that this strategy will have no net impact on his tax picture as the 401(k) contribution will be offset by the gain realized on the conversion. I know there is quite a bit of grey area regarding back door Roth conversions, but I didn’t know how grey of an area that I am muddling around in. If nothing else, I am thinking that I need to do the solo 401(k) contribution reduce the taxes owed on his Social Security.
Thanks in advance.
p.s. the client also has an IRA that we could convert instead of the solo 401(k) if that makes the question any more easy to answer.
Permalink Submitted by Alan - IRA critic on Tue, 2015-03-17 00:47
If you convert the solo K funds in the same year they were contributed and the plan allows these distributions, RMDs will be avoided because the plan will not have a year ending balance. For any plan that does have a year ending balance, the RMD must be completed before any additional amounts can be converted. Note that setting up the solo K with a Roth option would not have helped because designated Roth accounts have RMDs, so the contributions would still need to be directly rolled to a Roth IRA in the same year to avoid RMDs for that same year. As for taxation of SS benefits, any RMDs or conversions will increase AGI and therefore taxation of the SS benefits. There is no way of getting the earnings into a Roth IRA without creating AGI for the year, but converting to a Roth will reduce taxes for all following years by reducing RMDs in the following years.