Revisiting the backdoor ROTH-IRA conversion as I would like to increase the amount of tax-deferred/tax-free space available, while also maintaing the funds as liquid as possible. I am aware of the 5-year wait period before the converted funds are available for withdrawal without a 10% penalty. Of course if you are 59-1/2, the rule does no longer applies.
My T-IRA
Cost Basis: 10,939.61 (non-deductible IRA)
Market Value: 14,821.98
Taxable Gain/Loss: 3,882.29
SEP-IRA
Cost Basis: 6,176.40
Market Value: 5,161.97
Taxable Gain/Loss: (1014.43)
If I understand the tax amount due calculation, T-IRA/(T-IRA + SEP-IRA) = 14,821.98/(14.821.98+5,161.97) = 14,821.98/19,983.95 = .742% if I use the current SEP-IRA market value and not the original cost basis since there is a loss of 1K (not sure if this is correct). So, 100%-74.2% = 25.8% of the 14,821.98 converted, or 3824.07 is taxed at 28% FED, 10% CA with a total tax liability for 2013 of 1,453.14.
Another point I'm not sure of is whether it is 25.8% of the converted amount or 25.8% of the capital gain (3,882.29).
If I also convert the SEP-IRA portion to a ROTH-IRA (if possible), then the tax amount due = 25.8% of the 19,983.95, or 5,155.85 taxed at 28% FED, 10 CA = 1,959.22
Please review my logic and let me know if there are any other considerations not accounted for in the analysis.
Revisiting Backdoor Roth Conversion
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buddtholomew
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Revisiting Backdoor Roth Conversion
Last edited by buddtholomew on Sat Aug 11, 2012 8:48 pm, edited 1 time in total.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Re: Revisiting Backdoor Roth Conversion
I'm not sure on the SEP-IRA.
On the traditional tax-deferred IRA, when you convert it, you treat as income all the gains and any pre-tax contributions. So if your marginal rate is 25%, and all contributions were post-tax, you would owe 25% of only the gains as federal income tax. (Remember that you must pay the tax with other money, not from the account.)
As for the SEP-IRA, a quick read of the rules seems to indicate it is the same. However since all contributions were pre-tax, you have need to pay tax on the current market value, not just the gain (loss).
On the traditional tax-deferred IRA, when you convert it, you treat as income all the gains and any pre-tax contributions. So if your marginal rate is 25%, and all contributions were post-tax, you would owe 25% of only the gains as federal income tax. (Remember that you must pay the tax with other money, not from the account.)
As for the SEP-IRA, a quick read of the rules seems to indicate it is the same. However since all contributions were pre-tax, you have need to pay tax on the current market value, not just the gain (loss).
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buddtholomew
- Executive Member
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- Joined: Fri May 21, 2010 4:16 pm
Re: Revisiting Backdoor Roth Conversion
I was able to gather the following additional information. If you are still interested in working through this scenario, please use the below information.
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
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
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.