Profit Sharing contribution – ER deduction

Submitted by ShipsnGiggles on Wed, 2017-05-10 16:44

I had an fascinating question posed to me recently. I would appreciate any and all feedback

Sole proprietor – established an “owner only” 401(k) –
Owner maxes out his 402(g) deferral limit $24,000
Owner contributes 25% up-to the annual additions limit in the form of Profit Sharing = $36,000.

Question(s)

The owner does not want to take the deduction on the PS contribution.
Instead, he wants the PS contribution to be characterized as after-tax dollars so he can subsequently convert the dollars (basis?) to a Roth ira – tax free

Is this a viable strategy?

Thx



Submitted by William Tuttle on Thu, 2017-05-11 03:25

Employer contributions by definition must be pre-tax.

  • Employee after-tax contributions are allowed in a 401k and rolled over to a Roth IRA per IRS notice 2014-54.
  • However, these contributions and in-service rollovers of such must be allowed by the 401k plan document.
  • I am not aware of any mainstream one-participant 401k provider who supports employee after-tax contributions in their adoption agreement.
  • You would need a custom plan with a TPA to provide these features and this would not be for free.

Alternatively, provided your plan/provider/age allows in service withdrawals/rollovers of employer contributions you could do the following:

  • Make the full employer contribution
  • Take the full deduction
  • Rollover the contribution plus any earnings to a Roth IRA. This would be fully taxable, but the net effect would be the same as an after-tax contribution.

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