Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Backdoor ROTH-IRA Conversion Options
Old 08-12-2012, 11:17 AM   #1
Confused about dryer sheets
 
Join Date: Aug 2012
Location: San Francisco
Posts: 1
Backdoor ROTH-IRA Conversion Options

BOTH the T-IRA and SEP-IRA are my accounts. I am considering the following options:


Option 1. Roll-over SEP-IRA to OLD Fidelity 401K plan at previous employer if this is allowed. Alternatively, I can roll-over the SEP-IRA to my current employer's 401K plan at Nationwide if they accept the transaction (web search has not produced information on whether a SEP-IRA can be rolled into an old 401K).


Option 2. If #1 is achieved, then I can convert T-IRA to ROTH-IRA and pay taxes only the capital gains ($3,882 x marginal tax rate, FED and CA)


Option 3. If #1 is not permissible, then either convert a. T-IRA to ROTH-IRA or convert b. BOTH T-IRA and SEP-IRA to ROTH-IRA.

Taxes due on Option 3a. above = $6,704 * marginal tax rate, FED and CA
Taxes due on Option 3b. above = $6,704 * marginal tax rate, FED and CA + $2,339 * marginal tax rate, FED and CA

Please confirm my understanding and the tax implications for each option.


Best-
Budd
__________________

__________________
buddtholomew is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-12-2012, 02:00 PM   #2
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,085
Welcome to site Budd.

Why not not introduce yourself here and tell us a little more about your situation.

As to your question, if you do manage to roll your SEP-IRA to a 401k, don't do the T-IRA to ROTH conversion until the following year. Reason being is that when you do a ROTH conversion in, say 2012, you will be asked what was the total of all your IRAs on Dec 31st, 2011. In other words, the fact you do a rollover to a 401k in 2012 will not affect the calculation of taxable IRA money. At least that is my understanding but I could be wrong.

FYI, I did the opposite of what you suggest. In 2010 I did a ROTH conversion of my T-IRA which had a large basis as it was 100% funded with after tax money. In 2011 I did a tax free rollover of my 401k to an IRA so all the money I now have in IRAs is fully taxable. (zero basis)
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 08-12-2012, 02:02 PM   #3
Recycles dryer sheets
 
Join Date: Jul 2004
Posts: 430
Re: Options 2 and 3:

Assuming that the contributions to the T-IRA and SEP-IRA were deducted from taxable income at the time of deposit, then there are no "capital gains". Entire conversion to ROTH is taxable.

__________________
gindie is offline   Reply With Quote
Old 08-12-2012, 02:06 PM   #4
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,085
Quote:
Originally Posted by gindie View Post
Re: Options 2 and 3:

Assuming that the contributions to the T-IRA and SEP-IRA were deducted from taxable income at the time of deposit, then there are no "capital gains". Entire conversion to ROTH is taxable.

I agree.

It only makes sense if the T-IRA was funded with after tax money, then only the gains are taxed at withdrawal / conversion.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 08-12-2012, 03:59 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
Quote:
Originally Posted by Alan View Post

As to your question, if you do manage to roll your SEP-IRA to a 401k, don't do the T-IRA to ROTH conversion until the following year. Reason being is that when you do a ROTH conversion in, say 2012, you will be asked what was the total of all your IRAs on Dec 31st, 2011. In other words, the fact you do a rollover to a 401k in 2012 will not affect the calculation of taxable IRA money. At least that is my understanding but I could be wrong.
Alan........I think you might be remembering the right things for your situation but not for OP's. In your case, you already had the 0 basis funds in the 401K. You then did the Roth conversion of the TIRA in one yr but then correctly kept the 401K funds in the 401K until the next yr. If you had moved the 401K funds to TIRA in the same yr you converted the TIRA to Roth (even after you had done the Roth conversion), you would have had a TIRA balance at yr end and adversely affected the Roth conversion taxation equation.

OP's case is , as you mentioned, the opposite so OP will not have any TIRA balance at yr end if he does both transactions the same yr.
__________________
kaneohe is offline   Reply With Quote
Old 08-12-2012, 04:08 PM   #6
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,085
Quote:
Originally Posted by kaneohe View Post
OP's case is , as you mentioned, the opposite so OP will not have any TIRA balance at yr end if he does both transactions the same yr.
By George, you are correct. Thanks.
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 09:38 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.