Using Single K to reduce IRA’s and backdoor a roth

Submitted by ROTH CONV on Mon, 2019-12-02 18:22

Have a client with IRA, Simple IRA (to which he and employer are making contributions), and some Schedule C income. Makes too much to contribute to Roth. Wants to do IRA contribution (non-d) and convert. But with IRA and Simple there would be basis prorated and it isn’t a true back door, partially taxable.

Considering opening Individual K and on 12/31 moving IRA and Simple IRA into I 401k so that on 8606 there are NO other IRA assets other than the 2019 contribution that is to be converted…..

Would this work for “hiding” the IRA and Simple from the 8606, or would him getting a 5498 showing contributions to a Simple in 2019 (despite a $0 year end value) throw it all off?



Submitted by Alan - IRA critic on Mon, 2019-12-02 18:42

  • Did client make his first SIMPLE IRA contribution more than 2 years ago?  If so, and if his solo K allows IRA rollovers, he could roll his SIMPLE balance into the solo K along with the pre tax balance of his traditional IRA.  The tricky part here is completing the SIMPLE IRA rollover after the last SIMPLE contribution for 2019 and prior to year end. If the 5498 shows a SIMPLE IRA balance as of year end, that will have to be shown on Form 8606 and will create a taxable portion of the conversion. To be clear, only the actual SIMPLE IRA balance on 12/31 matters, not the amount of SIMPLE IRA contributions made throughout the year.
  • Am assuming that he is not an owner of the employer sponsoring the SIMPLE IRA.
  • If he has not met the 2 year SIMPLE IRA waiting period, he cannot transfer any money out of the SIMPLE IRA other than to another SIMPLE IRA, so this will only work if he has met the 2 year waiting period.

Submitted by William Tuttle on Tue, 2019-12-03 01:44

I see no mention self-employment income that would make the client eligibible to adopt a one-participant 401k. Assuming the client is eligible and has met the 2-year requirement outlined by Alan. This could work, but IRA to 401k rollovers do not happen instantly. I would submit the paperwork ASAP to make sure it is completed by 12/31. Do not do the Roth conversion until the rollover has been completed and verified. It is not all or nothing. Even if there is a pay period that is not rolled over. The pro-rata taxation on that amount will be much less.

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