solo 401k -Mega Back Door ROTH
In a recent email, Ed & his team said someone can contribute to a 401k and a solo 401k as long as companies are unrelated as per IRS rules. He mentioned how someone could contribute 58,000 after-tax dollars and then convert to ROTH provided solo 401k accepted after-tax contributions and allowed for in-service distributions. So that would be $26,000 of employee and $32,000 of employer contributions. Anywhere I read I see that the employer contributions must be pre-tax. What am I missing here?
Permalink Submitted by Alan - IRA critic on Thu, 2021-09-02 23:03
I think the email assumes that the elective deferral limit of 26,000 including age 50 catch up was all made to the 401k, leaving no room to make any more of these contributions to the solo K. Pre tax Employer match could also be made. However, 58,000 of after tax non Roth contributions could be made to the solo K. These are referred to as “employee contributions”, and if the plan allows them and also distributions, these contributions could be converted to Roth tax free. If the 58,000 generated any earnings before conversion to Roth, the earnings would be taxable. If there was no solo K, the employee could instead make after tax contributions to the 401k if the plan allows them, but the total contributions including catch up, matching contributions, after tax contributions and forfeitures for a single unrelated plan is 64,500. Quite often, due to ACP testing, a single 401k employer will limit after tax contributions below the max to avoid excess contributions. But if there is an unrelated solo K that allows after tax contributions, there is no ACP test that would limit them. So what you posted is possible, but there are several additional conditions to be considered.
Permalink Submitted by Dave Nolan on Tue, 2021-09-14 16:53
Can you cherry pick non-deductible 401k contributions when doing a Roth conversion? You can’t cherry pick non-deductible IRA contributions when doing a Roth conversion
Permalink Submitted by Alan - IRA critic on Tue, 2021-09-14 18:25
Yes, because after tax 401k contributions are held in a separate after tax sub account in the 401k that can be separately distributed even while still an active employee or rolled over without any pro rating with the rest of the pre tax 401k balance. It is possible that certain plans may adopt restrictions from the IRS rules limiting such distributions or the frequency of them. Any gains on the after tax contributions remain in the aftertax sub account, and those gains must be distributed with the after tax contributions. When rolled to a Roth IRA or to the Roth 401k (in plan Roth rollover), those gains would be taxable.