Backdoor ROTH-IRA Conversion Options

[buddtholomew]

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

[Alan]

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)

[gindie]

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.

[Alan]

Quote:

Originally Posted by gindie 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.

[kaneohe]

Quote:

Originally Posted by Alan 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.

[Alan]

Quote:

Originally Posted by kaneohe 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.