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.