Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
L1: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
I’m 54 years old, born on 9/16/64. I started a SEPP plan in Oct 2018, first distribution was Nov 15, 2018. I used a backdoor Roth IRA to convert funds in Dec 2018. I didn’t realize this until now that I’m doing my taxes. I retired in 2018 and had little income so I wanted to take advantage to convert funds but did it from wrong IRA. What are my options? Thank you in advance for everything that you do.
2019-03-03 17:48, By: Cali, IP: [2600:8801:d800:150:21ea:a9c9:99a1:10c6]
L2: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Please explain what you meant by “I transferred it from the wrong IRA ?”
It should never matter which TRADITIONAL IRA account(s) you do a ROTH IRA CONVERSION from. You were very astute in doing a ROTH IRA CONVERSION in a year with little or no income, but usually that term is used when someone’s income is too high, and they are making NON-DEDUCTIBLE IRA CONTRIBUTIONS, and then using the “back door” approach to convert them almost immediately thereafter.
You may have a common misconception that there is something called a “NON-DEDUCTIBLE IRA ACCOUNT”. (Not only taxpayers, but brokers and even tax professionals are often misinformed about this.) THERE ISN’T SUCH AN ACCOUNT !!! ALL TRADITIONAL IRA accounts are treated the same, and are lumped together when preparing the 8606 for distributions. If you thought that you could treat two different IRA accounts separately, you are mistaken. That is why people should use professional tax advisors, instead of thinking they are saving a few dollars, which in the long run will cost them much more than the fees they thought they saved. The 8060 form determines the ratio between the TOTAL NON-DEDUCTIBLE IRA CONTRIBUTIONS/ TOTAL IRA ACCOUNT BALANCES. (Which year’s balance is a matter of whether or not you made any rollovers from a 401-K/403-B, and if you took any distributions other than the conversion.)
The 2018 new tax act (TCJA) no longer allows re-characterization to reverse or correct the error that you think that you made.
If you did something differently, then you have to better explain what you did, in order to see if any of us can make any suggestion.
2019-03-03 21:06, By: dlzallestaxes, IP: [184.108.40.206]
L3: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Sounds like you converted some of your SEPP account to a Roth IRA. If the Roth IRA is a new Roth account without a prior balance, your SEPP is probably OK as long as you also distributed the right amount from your TIRA not counting the conversion. In this situation your SEPP would now include both your TIRA and the new Roth IRA.
However, if you converted into an EXISTING Roth IRA account, then your SEPP is definitely busted, and you would have to start a new plan this year if you choose to. You would owe the 10% penalty on your 2018 distributions except for the conversion.
Please clarify with respect to the above assumptions and comments.
2019-03-03 21:37, By: Alan S, IP: [220.127.116.11]
L4: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Clarification. Two different 401k were rolled into one IRA in 2017. My mistake was that I thought I had two IRA, but it’s only one. Funds were converted into an existing Roth IRA. Based on the Alan’s reply the SEPP is busted.
I contacted three different tax accountant but they did not have experience in these matters.
Thank you for the replies. I will start a new SEPP plan ASAP.
2019-03-03 22:52, By: Cali, IP: [2600:8801:d800:150:21ea:a9c9:99a1:10c6]
L5: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Filing your taxes for 2018 should not be more difficult due to the busted SEPP. Just report as if you never started the SEPP and unless you qualify for another penalty exception, pay the 10% penalty on your 2018 contributions. That can be entered directly on your 1040 Sch 4 line 59. You do not need a 5329.
The question now is what distributions have you taken so far in 2019?
2019-03-04 02:44, By: Alan S, IP: [18.104.22.168]
L6: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
No other penalties other than the two monthly distributions in 2018. I did take two monthly distributions in 2019 which I will pay penalty in 2020. Thank you for the clarification in where to enter information in 1040 form. I learned my lesson! I did not know I could retire early, I thought I had to wait until 62 years old to withdraw my funds. Someone recommended this forum and it was an eye opener.
In my late twenties a coworker in his sixties told me invest in 401k, 80-100% in equities, and never look at your statements until you are in your fifties. Not knowing anything about investing I literally followed his instructions. I’m thankful to you, my coworker and others that have helped me along the way. Everything I know about investing, I learned in the last two years, and still learning. Thank you.
2019-03-04 03:48, By: Cali, IP: [2600:8801:d800:150:d49f:6d57:d1bb:c81]
L7: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
You can set up your new SEPP as of 1/1/2019, using the 12/31/2018 balance. Calculate your ANNUAL DISTRIBUTION AMOUNT, and subtract what you already took in 2019 from that total, and take the rest during 2019. You are not required to take the same monthly payments, nor at any frequency or in any amount. The ONLY requirement is that you must take the annual total. This way you will not be subject to the 10% penalty on the 2019 distributions.
2019-03-04 05:49, By: dlzallestaxes, IP: [22.214.171.124]
L8: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Too bad you didn’t read more on this website. If you had waited until Jan 2019 (the year you were becoming 55), you would not have had to even set up your SEPP 72-T if your employer allowed you to continue your 401-K with him, and to separate from service as of 1/1/2019 or thereafter.
Also, if your company made its contributions to the 401-K in company stock, and if it had appreciated, then you should have looked into the special NUA provisions of the tax code.
2019-03-04 05:54, By: dlzallestaxes, IP: [126.96.36.199]
L9: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Waiting until Jan 2019 was not an option. I separated from one employer in 2012 and that’s were I had most of the savings. I did leave the funds there until 2017. I started working with new employer in 2013 but employer did not allow other 401k rollovers. Reading your forum and other websites I did learn about the rule of being able to withdraw funds if you quit/fire at 55 without a penalty.
2019-03-04 07:03, By: Cali, IP: [2600:8801:d800:150:d49f:6d57:d1bb:c81]
L8: Did I bust SEPP plan when I converted fund to backdoor Roth IRA?
Great! I did not know I could start a SEPP plan starting in Jan 1, 2019 and consider the two distributions I already took as part of the new plan.
Can I use 2/28/19 (higher balance) statement and still consider the two distributions I took in 2019? Or I must use 12/31/18?
2019-03-04 07:13, By: Cali, IP: [2600:8801:d800:150:d49f:6d57:d1bb:c81]