SEP rollover into 401(k) with backdoor Roth conversion
Dear Alan et al,
I have a client who has $51K in a SEP IRA and no other Traditional IRAs. He would like to make a $5,500 non-deductible IRA contribution for the 2018 tax year and then convert the balance to his Roth IRA.
My understanding is that if we roll the SEP up into his 401k (which will accept an incoming rollover) this year and convert the IRA to his Roth this year, we can avoid the pro-rata rule because his IRA would have a $0 balance on 12-31-19.
Does this sound correct to you?
Thanks in advance,
Chris
Permalink Submitted by Alan - IRA critic on Thu, 2019-01-17 15:42
Yes, and that means that no new SEP IRA contribution can be made in 2019 if client’s SEP is still active. If client needs to make a 2018 SEP contribution, he should make that contribution before rolling the SEP into the 401k. This applies whether the 401k is a solo K intended to replace the SEP IRA in 2019 or whether the 401k is from another employer.
Permalink Submitted by Danton Troyer on Tue, 2019-01-29 17:20
If the client also has a previous employer plan at what point could those funds be rolled to an IRA and not jeopordize the conversion? Would they need to wait until the next tax year?
Permalink Submitted by Alan - IRA critic on Tue, 2019-01-29 17:40
That IRA rollover would have to wait until 2020 or 2019 conversions would become mostly taxable. And even if the IRA rollover was delayed until 2020, it would then affect back door Roth conversions for 2020 and beyond.