How does a SEP IRA to Roth conversion work with after-tax funds?

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21

Murray said:
@Marvin2
That’s what I thought too. Though now, starting in 2023, there is such a thing. But back 5-10 years ago, this didn’t exist.

Technically, you can contribute IRA limits to an SEP, but it’s still counted as a traditional IRA contribution, even if deposited in an SEP.

Unless I’m mistaken.

22

@Marvin2
It was introduced under the SECURE Act in 2023. Now you can have a SEP Roth.

23

@Marvin2
Roth SIMPLE and Roth SEP IRAs were added. Under the SECURE 2.0 Act, employees can designate a Roth as the IRA for contributions.

SECURE 2.0 Act changes affecting amounts reported on the 2023 Forms W-2, W-2AS, W-2GU, and W-2VI | Internal Revenue Service.

24

@Murray
Got it, thanks!

Still wouldn’t call that a “nondeductible SEP” though. It’s really just after-tax contributions to a Roth. If OP had this setup, there’d be no need for a conversion.

25

Marvin2 said:
@Murray
Got it, thanks!

Still wouldn’t call that a “nondeductible SEP” though. It’s really just after-tax contributions to a Roth. If OP had this setup, there’d be no need for a conversion.

Exactly. There’s no such thing as a nondeductible SEP IRA. To get those benefits, you’d need to choose a Roth SEP. You can’t just put post-tax money in a standard SEP. The IRS doesn’t track the basis like it does for traditional IRAs, so once you put money in a SEP IRA, there’s no way to shift it to a Roth without tax, even if you didn’t take the deduction (if self-employed). Even with the Roth SEP option.

I get what you mean now.