tIRA/SEP IRA issue

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Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

tIRA/SEP IRA issue

Post by uwbadgers »

Hi,

I am having trouble contributing to a SEP IRA for 2020 tax year......here is the situation.

2020, contributed to ROTH IRA Jan 1......income too high, so did the following:

In early 2021....

Recharacterized ROTH contribution to tIRA
Coverted tIRA back to ROTH

This was all for the 2020 tax year.
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Now, my tax guy says based on my LLC (single member LLC) net income I can contribute $3,200 to a SEP IRA for 2020 and also save on taxes, nice!

But, when I go into Vanguard it says I've hit my maximum (6k) allowed contribution already.

What am I missing? Did I do something incorrectly?

I've learned my lesson and will not be diving into roth/iIRA until end of year as this was all a hassle :)

Thank you in advance!
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David Jay
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Location: Michigan

Re: tIRA/SEP IRA issue

Post by David Jay »

You didn’t specifically say that you had opened a SEP account at Vanguard. Just want to confirm that you were not trying to contribute SEP money to your tIRA account, because you are not even close to hitting the the SEP limit of $58,000.

SEP wiki link here: https://www.bogleheads.org/wiki/SEP
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
nolesrule
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Re: tIRA/SEP IRA issue

Post by nolesrule »

If you have to do a Backdoor Roth for regular IRA contributions, you might want to think twice about opening a SEP IRA.
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David Jay
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Location: Michigan

Re: tIRA/SEP IRA issue

Post by David Jay »

nolesrule wrote: Tue Mar 16, 2021 12:13 pm If you have to do a Backdoor Roth for regular IRA contributions, you might want to think twice about opening a SEP IRA.
There is an important point here for 2020 - if you do a SEP contribution for 2020, it will cause part of your Roth conversion (also in 2020) to be taxable.

You need to choose between SEP contributions and backdoor Roth, doing both will not be optional. To understand more, go the the Wiki page on the backdoor Roth and read the details, specifically the definition of “Traditional IRA” (which, for the purpose of the backdoor Roth includes SEP) and “pro-rata” taxation. Link: https://www.bogleheads.org/wiki/Backdoor_Roth
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
placeholder
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Re: tIRA/SEP IRA issue

Post by placeholder »

As I recall the rules allow opening a solo 401k still for last year so you could do that and put in contributions (it's not clear if you have any other income with existing employee contributions) but a 401k would not interfere with backdoor roth.
Alan S.
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Location: Prescott, AZ

Re: tIRA/SEP IRA issue

Post by Alan S. »

uwbadgers wrote: Tue Mar 16, 2021 8:26 am Hi,

I am having trouble contributing to a SEP IRA for 2020 tax year...

But, when I go into Vanguard it says I've hit my maximum (6k) allowed contribution already.
You did not identify on the VG site that your contribution was a SEP contribution. SEP contributions have limits independent of traditional IRA and Roth IRA contributions, therefore the 6k you already contributed does not affect your max SEP contribution.

VG would also require you to open a SEP IRA to make a SEP IRA contribution.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: tIRA/SEP IRA issue

Post by uwbadgers »

I ended up calling VG and they had me contribute as "employer" and it worked out fine. I already had made the SEP IRA.

So I believe that through my recharacterization/backdoor I am taxed on the earnings I had for the year it was in the ROTH and the new SEP IRA, which I could contribute to based off my net LLC income, helped lower my taxes owed.
SuzBanyan
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Re: tIRA/SEP IRA issue

Post by SuzBanyan »

uwbadgers wrote: Wed Mar 17, 2021 7:29 am I ended up calling VG and they had me contribute as "employer" and it worked out fine. I already had made the SEP IRA.

So I believe that through my recharacterization/backdoor I am taxed on the earnings I had for the year it was in the ROTH and the new SEP IRA, which I could contribute to based off my net LLC income, helped lower my taxes owed.
If your conversion from tIRA to Roth occurred in 2021, it will be taxable (or not) in your 2021 tax year. If there is a balance in your SEP IRA which came from making a deductible contribution as of 12/31/21, a pro rata share of the conversion will be taxable. If the SEP IRA contribution was $3200 and your non-deductible tIRA contribution was $6000, then the taxable portion of your conversion would be about 35%, payable as part of your 2021 taxes. For example, if you converted $6500 (including earnings) about $2,261 would be added to your taxable income in 2021. Form 8606 will give you an exact amount.
placeholder
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Re: tIRA/SEP IRA issue

Post by placeholder »

If you need to do backdoor roth on a continuing basis then I would not go for sep ira but look into solo 401k instead.
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