owner only 401k

Submitted by ShipsnGiggles on Mon, 2016-12-19 21:00

I have what I feel is a straightforward question.

Sole prop (no employees) wants to establish a solo-K. His intention is to defer the max (24,000) and fund the remaining dollars up to the 415 limit with after-tax contributions totaling $29,000. Subsequently convert the after tax dollars to a Roth IRA via an in-service distribution

Any reason this can’t be done? I am going on the assumption the plan document allows for after-tax contributions.

Thanks.



Submitted by William Tuttle on Mon, 2016-12-19 21:55

  • 401k after-tax contributions and in-service distributions are allowed by IRS regulations, but must be adopted by the plan. I am not aware of any mainstream provider that allows after-tax contributions. Also, most do not allow in-service distributions before 59.5 even for non-deferral contributions.
  • The only way this is currently possible is to have a plan document supporting such features provided by a Third Party Administrator (TPA). While mainstram providers offer no cost one-participant 401k plans, using a TPA will have non-trivial costs.

Submitted by Alan - IRA critic on Mon, 2016-12-19 22:31

  • It might be very difficult to find a solo K provider that includes an after tax sub account in the plan, but if the plan included all the necessary options, this would be IRS compliant.  Of course, the person would have to have sufficient net earnings from self employment, and could contribute 35,000 because the 6,000 catch up does not count toward the 53,000 limit.
  • While this would net out the same tax wise as a pre tax profit sharing contribution and taxable conversion, an after tax contribution could be done dollar for dollar of compensation, while the profit sharing contribution must adhere to a formula (20% of compensation for sole prop.) so with lower compensation amounts the max profit sharing contribution would be smaller than the after tax employee contribution. In addition, if the profit sharing contribution was used, the plan would have to allow distributions of that contribution in service to get the money into the Roth IRA as soon as a rollover from the after tax sub account.

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