Will a SEP-to-Roth Conversion Affect My SEP Contribution Limit?

By Beverly DeVeny and Sarah Brenner
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This week’s Slott Report Mailbag looks at SEP IRAs and answers two questions on how SEPs fit together with Roth conversions and required minimum distributions in the retirement planning puzzle. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

We are self-employed and our income is too high to fund a Roth IRA.  I want to convert some of my SEP to a Roth. However, will this affect the amount I can contribute to my SEP this year?  

Thank you, 
Jamie

Answer:
In your case, converting your SEP IRA to a Roth IRA can be a good way for you to fund a Roth IRA. Your income may be too high for Roth IRA contributions, but there are no income limits for converting. When you convert all or part of your SEP IRA to a Roth IRA, the amounts converted will be included in your taxable income for the year.

Here is some more good news. Converting will have no impact on your ability to make a SEP contribution in the year you convert or in any future year, if you are otherwise eligible. You might consider continuing to make a SEP contribution each year and subsequently converting those funds to a Roth IRA. Keep in mind that you should leave enough funds in the SEP IRA to keep the account open to receive your future contributions.

2.

Ed Slott and Company,

I am over the age of 70, still working and contributing to a SEP IRA.  My 2015 tax year contribution was made during 2016. I would like to calculate my 2016 required minimum distribution, but am unsure whether the 2015 contribution, which was made in 2016, should be included in the year-end balance for the calculation.

Thank you for your help!

Answer:
SEPs are strange animals. In some ways, they are like employer plans and in some ways they are like IRAs. You can continue to make SEP contributions for as long as you are still working and eligible. However, you are also required to begin taking required minimum distributions (RMDs) for the year you reach age 70 ½, even if you are still working.

The rules for calculating RMDs are complicated and very specific. The balance that must be used is the December 31 prior-year balance. The rules do require certain adjustments to that balance, but adding in a prior-year SEP contribution is not one of them. Bottom line, you catch a break and get to take a slightly smaller RMD from your SEP IRA for 2016 because the contribution that was made in 2016 for 2015 does not have to be added to the 2015 prior balance that is used to calculate the 2016 RMD. Whew!