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Author: Hillmp Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Convert SEP to Roth? Date: 6/22/1999 4:11 PM
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My wife has a SEP which is in the process of being transferred from Vanguard to Ameritrade - all the better to invest Foolishly. I've read a bit about Roths and find their tax-free growth compelling.

Is their a way to convert the SEP into a Roth?

From the reading I've done it seems that it would have to convert first to a regular IRA, then from the regular IRA to the Roth. If this is the case, are there significant disadvantages to such a conversion?

Assuming she made such a conversion, could my wife then make annual contributions to the Roth instead of the SEP? My sense is the tax-free growth of the Roth would outweigh the higher contribution limit allowed by a SEP.

Many thanks for any help.

Michael
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11457 of 76237
Subject: Re: Convert SEP to Roth? Date: 6/22/1999 5:11 PM
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Greetings, Michael, and welcome. You asked:

<<From the reading I've done it seems that it would have to convert first to a regular IRA, then from the regular IRA to the Roth. If this is the case, are there significant disadvantages to such a conversion? >>

The SEP is nothing more than a special form of a traditional IRA, and it may be converted to a Roth IRA provided you meet the AGI limits for doing so.

<<Assuming she made such a conversion, could my wife then make annual contributions to the Roth instead of the SEP? My sense is the tax-free growth of the Roth would outweigh the higher contribution limit allowed by a SEP.>>

She may make a nondeductible $2K annual contribution to the Roth. The SEP would allow her to make a deductible contribution of up to 15% of her net self-employed compensation or $22.4K per year, whichever is less.

Are you aware she may contribute to both the SEP and a Roth IRA? Contribute to both, and nothing says that in a future year she can't convert the SEP to a Roth again provided the AGI limits for that year are met and you can afford the tax bill. That's one way of getting more than $2K per year into a Roth, i.e., just do a conversion of SEP monies every year or two.

Regards..Pixy



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Author: Hillmp Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11484 of 76237
Subject: Re: Convert SEP to Roth? Date: 6/23/1999 4:48 PM
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Thanks, Pixy. A follow up question, if I may...

You replied...
>>Are you aware she may contribute to both the SEP and a Roth IRA? Contribute to both, and nothing says that in a future year she can't convert the SEP to a Roth again provided the AGI limits for that year are met and you can afford the tax bill. That's one way of getting more than $2K per year into a Roth, i.e., just do a conversion of SEP monies every year or two.>>

This sounds great, but I'm unclear how to go about doing it. If the SEP is converted to a Roth, does the SEP continue to exist with a zero balance? Or does some balance need to be left in it in order for it to remain active?

Would future conversions of funds contributed to the SEP become a separate Roth (i.e. a new Roth IRA for each conversion) or can future funds from the SEP go into the original Roth?

Last question: Am I correct in thinking that future funds contributed to the SEP, although tax deductible at the time, become taxable upon future conversion to Roth? If so, it would make sense to put $2000 in the Roth and the balance in the SEP since the Roth will grow tax free until the next conversion...yes? (OK, *that's* the last question.)

Starting to enjoy all this Foolishness,
Michael

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11496 of 76237
Subject: Re: Convert SEP to Roth? Date: 6/24/1999 7:35 AM
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Michael asks:

<<This sounds great, but I'm unclear how to go about doing it. If the SEP is converted to a Roth, does the SEP continue to exist with a zero balance? Or does some balance need to be left in it in order for it to remain active?>>

If you convert all of the SEP, then that particular account would cease to exist; however, another SEP account could be opened to receive the continuing SEP contributions. An easier solution is just to leave some money in the existing SEP by converting only part of the funds to avoid the hassle of opening a new SEP account.

<<Would future conversions of funds contributed to the SEP become a separate Roth (i.e. a new Roth IRA for each conversion) or can future funds from the SEP go into the original Roth?>>

They may go to the same Roth. You must, though, keep track of the date of deposit and the amount to ensure you comply with the 5-year rule for withdrawals to avoid any unpleasant tax surprises in the event you decide to make a withdrawal.

<<Last question: Am I correct in thinking that future funds contributed to the SEP, although tax deductible at the time, become taxable upon future conversion to Roth? If so, it would make sense to put $2000 in the Roth and the balance in the SEP since the Roth will grow tax free until the next conversion...yes? (OK, *that's* the last question.)>>

That's correct. Anything that gets transferred to the Roth will be taxed in the year of conversion. With that as the case, it makes sense to deposit the first $2K in the Roth if you intend to ultimately convert the SEP contributions anyway.

Regards..Pixy


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