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How to convert a SEP IRA to Roth?
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3 Replies
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I’m waiting for my Fidelity accounts to be opened. I will have a pre-tax, Roth, and after-tax accounts. I currently have a SEP IRA at Fidelity, funded with pre tax money, and would like to do a mega back door on it. What account do I move this money to? The Roth or the after-tax? Is there a limit to the amount I can do in 1 year? If so, what is the limit (I am over 50). I’ve put $5K in a pretax 401K so far this year (if that affects how much I can mega backdoor).
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QUESTION:
I’m waiting for my Fidelity accounts to be opened. I will have a pre-tax, Roth, and after-tax accounts. I currently have a SEP IRA at Fidelity, funded with pre-tax money, and would like to do a mega back door on it. What account do I move this money to? The Roth or the after-tax?
RESPONSE:
1) To execute a conversion with funds from a SEP IRA at Fidelity, the solo 401k owner should first transfer the pre-tax funds from the SEP IRA to the pre-tax solo 401k sub-account. After this transfer, the funds can then be moved from the pre-tax solo 401k sub-account to the Roth solo 401k sub-account. This conversion will be both taxable and reportable on Form 1099-R. See more: https://www.mysolo401k.net/items-to-consider-if-you-plan-to-process-a-self-directed-roth-solo-401k-pretax-in-plan-conversion-in-2024/
2) The process to make a mega backdoor Roth solo 401k contribution involves several steps:
- Make After-Tax Contributions: The solo 401k owner makes voluntary after-tax contributions to their solo 401k plan. For 2024, the voluntary after-tax contribution limit is 100% of self-employment compensation, not to exceed $69,000. If the solo 401k owner is 50 or older, the limit increases to $76,500, which includes a $7,500 catch-up contribution that must be made as a pre-tax or Roth employee contribution (the catch-up contribution is not made as a voluntary after-tax contribution but made directly to the Pre-tax or Roth sub-account as an employee contribution).
- Transfer to Roth Solo 401k: Once the voluntary after-tax contributions are made to the voluntary after-tax sub-account, the solo 401k owner can then transfer these funds to the Roth solo 401k sub-account. This transfer is not taxable but is reportable. The solo 401k owner will need to report it on Form 1099-R (note: we have an online form that clients use to provide us the information to prepare the 1099-R which we handle as an optional free service for our clients).
QUESTION:
Is there a limit to the amount I can do in 1 year? If so, what is the limit (I am over 50). I’ve put $5K in a pretax 401K so far this year (if that affects how much I can mega backdoor).
RESPONSE:
For 2024, the total contribution limit for a solo 401k is $69,000, or $76,500 if the solo 401k owner is 50 or older. This limit includes all contributions: employee deferrals, employer contributions, and voluntary after-tax contributions. Since the solo 401k owner has already contributed $5,000 to a pre-tax 401k, this amount will count towards the overall limit. Therefore, the maximum voluntary after-tax contribution that can be made for the mega backdoor Roth conversion is $64,000 if under 50, or $71,500 if 50 or older, provided the solo 401k owner has sufficient self-employment income to support these contributions. See discussion above regarding contribution mechanics.
Learn More
- The Mega Back Door Roth Using a Solo 401k Plan
- Max Out Your Mega Roth Solo 401k: How much self-employment income do I need to max out my mega backdoor roth solo 401k?
- Things to consider before processing rollover from SEP IRA to: self-directed solo 401k
mysolo401k.net
My Solo 401k Financial offers self-directed Solo 401k, IRA LLC & ROBS 401K Retirement Plans. Learn about Items to Consider if You Plan to Process a Self-Directed Roth Solo 401k Pretax In-Plan Conversion in 2024
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Thank you. I have a couple of clarifying questions.
In Response #1, you did not refer to the movement of the funds from the SEP IRA to the pre-tax 401K and then into the Roth 401K account as a mega backdoor. This conversion is NOT considered a mega backdoor? And if so, I am NOT held to the $69K contribution limit? I have more than that limit in the SEP so I just want to make sure I can do it all in the same year. I understand the conversion will be a taxable event. Do you send me a 1099-R (using your online tool) for this or does Fidelity?
In Response #2, 2, you state that the movement of the voluntary after tax funds from the after tax account into the Roth 401K account is a taxable event. The after tax funds are already included in my gross income calculations for the year and I will pay income tax on them. Does this in plan Roth conversion result in the after tax funds being taxed again?
Finally, when is IRS form 8606 required? Under what circumstances will I need my CPA to do that for me?
Thank you!
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QUESTION:
In Response #1, you did not refer to the movement of the funds from the SEP IRA to the pre-tax 401K and then into the Roth 401K account as a mega backdoor. This conversion is NOT considered a mega backdoor? And if so, I am NOT held to the $69K contribution limit? I have more than that limit in the SEP so I just want to make sure I can do it all in the same year. I understand the conversion will be a taxable event. Do you send me a 1099-R (using your online tool) for this or does Fidelity?
RESPONSE:
Transferring pre-tax funds from a SEP IRA to a pre-tax solo 401k sub-account and then converting those funds to a Roth solo 401k sub-account is not considered a mega backdoor Roth solo 401k contribution. Instead, it is a rollover of pre-tax funds from an existing retirement account to the pre-tax solo 401k sub-account, followed by an in-plan Roth conversion. There is no limit on the amount of funds that can be converted from a pre-tax solo 401k sub-account to a Roth solo 401k sub-account, so the solo 401k owner is not held to the $69,000 contribution limit for this type of conversion. Fidelity will issue a Form 1099-R to report the non-taxable rollover of funds from the SEP IRA to the pre-tax solo 401k sub-account. We will issue another Form 1099-R for the taxable in-plan conversion from the pre-tax solo 401k sub-account to the Roth solo 401k sub-account.
QUESTION:
In Response #2, you state that the movement of the voluntary after tax funds from the after tax account into the Roth 401K account is a taxable event. The after tax funds are already included in my gross income calculations for the year and I will pay income tax on them. Does this in plan Roth conversion result in the after tax funds being taxed again?
RESPONSE:
Thank you for your feedback. The transfer from the voluntary after-tax solo 401k sub-account to the Roth solo 401k sub-account is generally not taxable. The only exception is if there are gains in the voluntary after-tax solo 401k sub-account between the time of the contribution and the subsequent transfer to the Roth solo 401k sub-account. In such a case, the gains portion is taxable. The voluntary after-tax contributions themselves are not taxed again.
QUESTION:
Finally, when is IRS form 8606 required? Under what circumstances will I need my CPA to do that for me?
RESPONSE:
IRS Form 8606 does not apply to 401k plans, including solo 401k plans. Form 8606 is used for nondeductible IRA contributions, not for self-directed solo 401k voluntary after-tax contributions.
Learn More
- Things to consider before processing rollover from SEP IRA to: self-directed solo 401k
- The Mega Back Door Roth Using a Solo 401k Plan
- Form 8606 applies to nondeductible IRA contributions not self-directed solo 401k voluntary after-tax contributions
mysolo401k.net
My Solo 401k Financial offers self-directed Solo 401k, IRA LLC & ROBS 401K Retirement Plans. Learn about Things to consider before processing rollover from SEP IRA to: self-directed 401k | self-directed Solo 401k |401k real estate | Solo 401k | … Continue reading
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