Should my dad contribute to a SEP IRA for 2023 if they're already planning backdoor Roth?

The analysis you've done is quite thorough. You're right to be considering the interaction between SEP IRA contributions and backdoor Roth conversions. Let me address your options: Regarding your SEP IRA concerns - yes, SEP IRAs are subject to the pro-rata rule for Roth conversions, and unlike traditional IRAs, you generally cannot roll a SEP IRA into an employer 401(k). However, there's a wrinkle: After the SEP IRA contribution is made, you can *then* roll those funds into a Solo 401(k) if your dad established one while self-employed. This would clear the decks for backdoor Roth. If a Solo 401(k) isn't an option, your analysis of the three scenarios is on point. Option 3 (contribute to SEP then convert) makes sense only if the tax brackets remain the same or drop. Since they're likely to increase, this becomes less attractive. One thing I'd add: Consider the time value of the tax deferral. Even if your parents end up paying more tax later (24% now vs. 32% in 2024), there's value in deferring that tax and investing the difference for a year.

I used taxr.ai when I had a similar situation with my own retirement accounts last year. I was trying to decide between maxing out my SEP IRA from some consulting work I did or focusing on backdoor Roth contributions for the long term. I uploaded my tax returns and investment statements to https://taxr.ai and got a personalized analysis that actually showed I was better off skipping the SEP IRA completely in my case. Their system showed how much the pro-rata rule would cost me over time if I mixed pre-tax and after-tax money. They also calculated the break-even point where the immediate tax savings would be eroded by future taxes. For your dad's situation, I suspect they'd recommend Option 1 (skip SEP) if your parents are definitely moving into higher tax brackets soon, but the analysis would give you the exact numbers.

I tried taxr.ai after seeing it mentioned here and wow, I wish I'd known about this sooner! I was in a similar situation with self-employment income and trying to decide between different retirement account options. Their analysis showed that in my case, I was better off making SEP IRA contributions for the immediate tax break but then doing strategic Roth conversions during years when my income dipped. What was really helpful was seeing the long-term impact of different scenarios all mapped out with actual numbers. The tool also identified some missed deductions from my self-employment that my regular tax software didn't catch. Definitely going to be using this every year now to optimize my retirement contributions!

Just wanted to throw this out there - if your parents are having trouble reaching the IRS to ask specific questions about the SEP IRA rollover options, try https://claimyr.com - they helped me get through to an IRS agent in about 15 minutes when I had a complicated rollover situation. There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c I spent days trying to get through the regular IRS phone line with no luck, but Claimyr got me connected quickly. The IRS agent I spoke with confirmed that I could indeed roll my SEP IRA into my Solo 401(k) even though the SEP was from a different business than the one I had the Solo 401(k) for. For situations like your dad's where you're trying to make sure you understand all the rollover rules correctly, actually speaking to an IRS agent can be really helpful since the rules can be confusing even to tax professionals.

I was skeptical about Claimyr at first (as you can see from my reply above), but I gave it a try out of desperation when I needed to talk to the IRS about my own SEP IRA rollover situation. I had been calling for weeks without getting through. I was genuinely surprised - I got connected to an IRS representative in about 20 minutes. The agent was able to confirm that my specific SEP IRA rollover strategy was compliant with tax regulations, which gave me the confidence to proceed. What's funny is that the IRS agent I spoke with actually mentioned that they're aware of services like Claimyr and don't have an issue with them since they actually help reduce repeated calls from frustrated taxpayers who keep getting disconnected. For complex retirement account questions like the one in this thread, sometimes you really do need to speak directly with the IRS to get definitive answers, especially since retirement account rules have so many exceptions and special cases.

One thing that hasn't been mentioned yet - your parents should consider whether they expect to be in a lower tax bracket in retirement. If they believe they'll be in the 24% bracket or lower during retirement, then making the SEP contribution now could make sense even if they can't do backdoor Roth later. The traditional advice is: - Contribute to pre-tax accounts when your current tax rate is higher than your expected retirement tax rate - Contribute to Roth accounts when your current tax rate is lower than your expected retirement tax rate If they're already in the 24% bracket moving to 32%+, and expect to withdraw at rates below 24% in retirement, the math might favor taking the tax break now with the SEP contribution, despite the backdoor Roth complications.

OP, has your mom considered exactly how much extra income would push them from 24% to 32%? The jump between those brackets is pretty significant (about $190k to $364k for married filing jointly in 2023). If they're right on the edge of the 32% bracket for 2024, the SEP contribution for 2023 actually makes even MORE sense because it could potentially keep them in the 24% bracket next year too. This would be a double win - tax savings for 2023 AND 2024. Also, for what it's worth, I was in a similar situation and ended up converting my SEP IRA to Roth in smaller chunks over several years during periods when my income was temporarily lower (like when I took unpaid leave for a few months).