SEP to a Roth

[Guest Awramik]

Earlier this year, I worked hard to keep my AGI under $100,000 so I could qualify for a Roth and convert my traditional IRA to Roth. I have done so.

This week I learned that a SEP can also be converted to a Roth (no thanks to my Financial Advisor at a big brokerage that shall remain nameless but whose initials are ML).

My question is this. I made a $9000 contribution to my SEP this tax year. That comes off the top of my self-employed income on Schedule C. Ergo, my AGI stays below $95K for tax year 1998.

If I convert the SEP to a Roth, can I still deduct the $9000 on schedule C; recognizing of course that taxes will be due on the lump sum disbursement of the SEP?

For a traditional IRA, which is an adjustment to income on the front of the 1040 form, conversion to a Roth means that the deduction may not be made.

In the case of Schedule C, contribution to a retirement account might still be considered a business expense.

The Catch-22 in all this is that: if the SEP contribution is NOT deductible as a business expense, then my MAGI will be above the allowable $100k limit.

Another question: How about if I don't convert my entire SEP to a Roth? Any way I can avoid increasing my MAGI that way?

Advice would be greatly appreciated. I have scoured the web, IRS instruction, etc. and can find support to argue both ways.

[Gary Lesser]

Your SEP contribution will remain deductible (keeping you under the $100k limit) even if the underlying IRA is converted to a Roth IRA. A conversion is not the same thing as a recharacterization (and incidently, a SEP can't be recharacterized). So youy should be okay.

[Guest Paul McDonald]

Maybe I'm reading your question wrong, but aren't you taking the SEP deduction in the wrong place?

You said your SEP contribution comes off the top on Schedule C of your self-employed income. The deduction for any of your employees comes off the Schedule C but the deduction for the self-employed individual is taken off on the 1040 based on your Schedule C Net Profit minus 1/2 SE taxes times an adjusted percentage to make the math work out. The deduction is taken on 1040 on the line that references KEOGH and I believe there is also a box identifying if it is to a SEP. If you put the numbers in the correct places you may exceed the limits by more than you think. Am I missing something?

[Guest Awramik]

Yes, you're right. I am self-employed and the SEP deduction does come off the front of the 1040. My question still remains, though, can I contribute to an existing SEP, use the contribution as an adjustment to income, and still qualify for the Roth?

If I can't use the contribution as an adjustment to income and convert to a Roth, then, can I use this year's contribution as an adjustment and convert previous years SEP to a Roth?

Then, I could stay under the 100K limit and at least make a partial conversion to the Roth.