Today we revisit the issue of doing the mega backdoor Roth in a solo 401k for those of you who are self-employed. For more background on solo 401k, please read Solo 401k When You Have Self-Employment Income.
As I mentioned in the previous article The Elusive Mega Backdoor Roth, mutual fund and brokerage companies who provide solo 401k plans, such as Vanguard, Fidelity, Schwab, TD Ameritrade, and E*Trade, don’t allow non-Roth after-tax contributions in their packaged plans. If you want non-Roth after-tax contributions you will have to step up and take it into your own hands: get your own documents and administer it yourself or outsource the administration to someone.
Originally I thought the overhead of obtaining and maintaining your own documents would cost too much to make it worthwhile for a solo 401k plan. Reader Nora Bethman is the President of a third-party administrator (TPA) for retirement plans. She told me it wasn’t necessarily so.
How Much Room
Before we go into the details, let’s see how much room you have for non-Roth after-tax contributions in your solo 401k.
You have the most room if your income from your self-employment business comes to $50k to $70k per person. If you are getting much more than $50k to $70k per person, say $180k per person or more, you will be able to hit your maximum with your $18k plus employer profit sharing contributions alone. If you are getting much less than $50k to $70k per person, then after your $18k and employer profit sharing contributions there won’t be as much left for non-Roth after-tax employee contributions.
To get an idea for how much room you have for non-Roth after-tax employee contributions, use this spreadsheet:
The spreadsheet is per person. If both husband and wife work in the business, divide up the income and enter it once for each person. It works for both full-time and part-time self-employment. If you only have self-employment income, just set the day job related fields to zero. Also be sure to choose the right tab depending on whether you are taxed as a sole proprietor (“unincorporated”) or S-Corp or C-Corp (“incorporated”).
Because the scenarios can be complicated, the spreadsheet may not be accurate for every case. Be sure to double-check with a professional before you make contributions.
Value In a Roth vs Taxable
Each dollar you can put into your Roth IRA is more valuable than the same dollar left in a taxable account. Using the spreadsheet below, you will see it can be 28% more valuable in 30 years or 11% more in 10 years.
Because of the tax-free growth in a Roth account, you need $2,800 more today in a taxable account in order to match putting $10,000 in a Roth and letting it grow for 30 years. If you must pay a small cost get that $10,000 into a Roth, it will be worth it. The more room you have for non-Roth after-tax contributions in your solo 401k, the more valuable it is to add this feature to your plan.
Plan Document and Adoption Agreement
A service provider will provide you a plan document and an adoption agreement which enable the non-Roth after-tax contributions and the in-service distribution of such contributions and earnings thereon. You pay a fee for the document. You will be the trustee.
As laws change, you will be asked to adopt amendments. You pay an ongoing fee to keep your documents updated.
FBO Accounts Or Pooled Account
With the plan document and the adoption agreement, you can open Investment-Only Accounts at Fidelity, or Company Retirement Accounts at Schwab, and maybe at other places too. The custodian doesn’t handle tax reporting for these accounts.
With just one or two participants, I would open a separate account for each participant and each money type:
- husband pre-tax
- husband Roth
- husband after-tax
- wife pre-tax
- wife Roth
- wife after-tax
This way you can track each bucket separately. These separate accounts for each participant are also known as “FBO accounts.” Note the pre-tax, Roth, and after-tax labels are purely your own nicknames. The custodian only sees 3 accounts for the same participant. They don’t know or care which is which.
You can also open just one account for the entire plan (a “pooled account”) and have your TPA track the different buckets internally. Vanguard only accepts pooled accounts. For just one or two participants, it’s easier and free to track them with separate brokerage accounts, but you can’t do it that way at Vanguard.
As the trustee, you are responsible for putting the right amount in the right account and track the different tax treatment. When you make a distribution from the after-tax account in the plan to a Roth IRA, you or your TPA will have to send a 1099-R to the IRS and send a copy to the participant. If you do the 1099-R yourself, you can e-file it online at tax1099.com for $3 a piece.
If the plan assets exceed the reporting threshold, you still do the 5500-EZ the same way as you do today. See Form 5500-EZ For Your Solo 401k.
Document Service Fees
The fees below are of course subject to change by the providers.
National Employee Benefit Services charges $775 for the setup plus $100/year for maintaining the document. Full administration including one distribution and one 1099-R per year comes in under $500 per year.
Employee Fiduciary includes non-Roth after-tax contributions in custom individual 401k plans. They charge $500/year in base administration fees plus 0.08% of plan assets.
Ascensus charges $205 a year for document compliance services only. It doesn’t include administration. You still need to hire an administrator. Call 866-604-7402. Hat tip to Rox on the Bogleheads investment forums.
I went with Ascensus because I’m comfortable with administering the plan myself. While I was at it, I also enabled in-plan Roth rollover, which I may do in the future. I’m keeping my assets at Fidelity in separate FBO accounts for each participant and money type. For a rundown of the steps I took in doing it through Fidelity, see Executing Mega Backdoor Roth In Solo 401k.
Readers not familiar with how to administer a 401k plan should go with a TPA for a modest cost. Laws and regulations are complex. There are many ways to mess up. Get professional help if you’d like to pursue this option.
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saildawg says
Harry,
Thank you so much for the articles and calculator. I do not quite understand all the nuances, but the calculator has given me the confidence to go forward. In playing with the numbers it seems that on 50k 1099 earnings total contributions are actually larger if I use 0% PSP vs 25% (note 19k employee contribution from W2 with wages $250,000)
For 0% I get $0 PSP + 49,330 after tax non roth = 49,330 total
For 25% I get 9,866 in PSP + 29,598 in after tax non roth =39,464 total
I am going to use 25% as I am in a high marginal tax bracket so PSP is more valuable, but was hoping to understand why there is a difference. Thanks for everything.
Harry Sit says
From the business’s point of view, after it makes the profit sharing contribution, the rest is paid to the owner as compensation. The rule says the total contribution of all types (elective deferral + profit sharing + after-tax) can’t exceed the compensation. Because profit sharing is on both sides of the equation, $1 in profit sharing reduces after-tax contribution by $2.
Sophia says
Hi Harry,
Some questions about distribution of the solo 401k maximum allowed 2019 contribution ($56k if under 50 and $62k if 50 or over) among “salary deferral,” “profit sharing,” and “non-Roth after tax contribution”: Your great calculator (thank you!!) first maxes out “salary deferral” and “profit sharing” and then puts the rest of the allowed amount (assuming solo business has enough net profit) in “after tax.” Would it be allowable to say put $0.0 in the salary deferral and instead put that $25 k (or $19 k if under 50) in “after tax” along with the amount the calculator suggests? An example might be $76,000 in business profit (over 50): The calculator gives $25,000 for employee deferral , $14,126 for profit sharing and $22,874 for after tax. Could one put $0 in employee deferral, $14,126 in profit sharing and $47,874(=25K+22,874) in after-tax? Or, taking it further, could one even just put all $62,000 in after tax and $0 in employee deferral and $0 in profit sharing?
I guess the pros of being able to do this are as follows:
-Once the 401k goes over $200,000, there is additional annual reporting required, so it might be nicer to put the money in after tax and shift out to Roth IRA each year to avoid the reporting hassle.
-In general, there seems to be less flexibility with the salary deferral portion – once it is put in the solo 401 k, it needs to stay there until plan is closed or until distribution time.
-Once business profits for the year drop under the level of $76k or so, one can’t max out the $62,000 limit, because the profit-sharing contribution is subtracted twice from the biz income in determining how much biz income there is to put into these retirement accounts. Thus, putting that “profit sharing” amount into after tax instead, if allowed, would help people with biz income under $76 k put away more in retirement funds (get closer to the $62 k max) if they like.
The con might be:
-If the after-tax contribution is quickly rolled into to Roth IRA each year (to maximize the benefit), it may be better not to maximize the contribution/ attract attention to it and instead put as much into salary deferral and profit sharing first, as calculator suggests. The reason would be that this is a less widespread practice and perhaps not the original intent of allowing after-tax. Or another way to put this: If the original intent of After-Tax option in the relevant legislation was to allow those that have more to put away into retirement funds to go beyond the salary deferral and profit sharing, maybe it is better to stick with the original intent in how we implement (maxing out salary deferral and profit sharing first), even if technically we could do otherwise and put $62k in after tax and soon thereafter rollover to Roth IRA.
Would love to get your thoughts on this issue of whether we should be sure and max out the employee deferral and profit sharing first (as in your calculator), or we could well consider instead putting more into after tax as described above if there seem to be benefits.
Harry Sit says
The maximum contribution spreadsheet already has an input for the desired profit sharing (0% – 25%). You can set it to 0% if you’d like to do more after-tax. Beyond that, I would follow the spreadsheet, especially when you are 50 or over, because the catch-up amount is only activated after you max out the salary deferral. Note the salary deferral can be either pre-tax or Roth.
Sophia says
Hi Harry – Thanks a lot! I understand now that, for the 50 and over crowd, if we want to maximize solo 401 contributions, then we should max out the salary deferral (19k+6k), but that then the rest (37K for 2019) could go into after tax if we prefer to pay taxes now (perhaps to benefit from QBI) and/or if our income is less than $75k so that the after tax option allows us to put away a greater total amount in the 401k than would be possible if we did the employer contribution. Filling out an extra form (5500) once the solo 401k goes over $200k is certainly worth the ability to put away the extra $6k catch-up contribution each year.
AJ says
Very interesting thread…here’s my situation. Currently have a Fidelity solo 401k from when I was self-employed about 10 years ago. Been w-2 since then but this year should have about 75-100k in self-employment net profit. Will be w-2 employee again starting in about one month and plan to max out salary deferral of 26k—I’m over 50–in new employer plan. Would like to set up new solo 401k strictly to make after-tax contribs with an eye to doing mega backdoor. Not sure if I need to terminate Fidelity solo—can’t do after-tax contribs there. Thinking of rolling fidelity account into traditional IRA, terminating plan, then setting up new solo 401k that allows after-tax and making only after-tax contribs and doing mega backdoor—this would all happen by year end 2020. Any issues or potential problems? Also do you have an updated calculator to help determine max after-tax contribs I can make for new solo 401k in my scenario. Thanks for any input.
Sophia says
Hi AJ: Interested to hear what Harry says on this. From my experience setting up a self-directed solo 401 k after having a prototype solo 401 k at TD Ameritrade, I understood that I needed to close the prototype plan accounts if they were for the same business (which it was). I did roll the prototype plan investments into the new self-directed one but it was a huge hassle as TD Ameritrade could not grasp I was moving “like” to “like.” Finally it worked out, though. Probably, closing down the prototype and rolling into IRA would be a lot easier, though not sure if there are any caveats if it is for the same business. (I think in my case I thought I shouldn’t just shut down one plan and start a new plan since the business was continuing, but don’t think I verified that that was a requirement.) If you do do the rollover to the self-directed 401 k, then I think you are “restating” the plan rather than starting a new one and there may be a few advantages to that (like being able to rollover employer contribution earlier to an IRA), but if you can move everything to an IRA then you wouldn’t need that advantage and probably the only remaining one is having more $$ to do self-directed stuff (if you are doing non brokerage firm stuff) or having more $$ for a loan at some point. But you may also hit the $200k limit where you have to do an extra form each year sooner.
David Ann Arbor says
I think you have to get a company that provides you plan documents to restate your Fidelity solo 401k plan which I think what this blog post is all about.
Then with the restated plan documents you’ll be able to make after-tax contributions to your 401k that are then rolled over into the Roth.
Your accounts at Fidelity are transferred over to non-prototype accounts. You’ll have a pre-tax account for the account that had tax deferred contributions, another after-tax contribution account, and then a Roth account. Or you could roll the after tax contribution into a Roth IRA.
Harry Sit says
The first rule in a solo 401k is to realize that a solo 401k is not a bigger IRA. Don’t adopt, amend, or terminate a solo 401k willy-nilly. If you take some action, only do it for the long term.
Therefore, if having self-employment income again is only this year and it will go away next year, just make the employer contribution to the existing Fidelity plan. You won’t be able to contribute as much, but it’s not worth making a bunch of moves and risking something going wrong for just one year.
If you will have $75-100k in self-employment income per year in addition to your W-2 income for the foreseeable future, then consider hiring Employee Fiduciary, amending and restating the plan to Employee Fiduciary’s document, and transferring the existing assets. Don’t terminate the plan.
AJ says
Hi Sophia–Thx for your input. The Fidelity plan was for self-employment between 2005-2012…haven’t contributed to it since then. It does have in excess of 250k so I have been doing 5500SF filings. This year since I’ll have meaningful self-employment income, I’d like to contribute ideally only after-tax dollars, since I’ll have w-2 job where I can max out my 26k pre-tax or Roth contribs. I can’t do what I want thru Fidelity–no ability to do after-tax–so I’m considering something like Employee Fiduciary, Solo401k.com or the like. I’d prefer not to rollover the Fidelity into the new plan…rather terminate it and roll it into a traditional IRA. Wondering if there is a need to wait a certain time–one year?–before I set up a new solo 401k after I terminate the old…or whether I could have a new one created in same calendar year I terminated old one. Technically I could say it’s a different business…it’s 8 years later and doing something related but different enough from prior self-employment. Curious what Harry has to say about all this too. I am sophisticated enough that I don’t think I need full-fledged TPA…just want to clarify the feasibility of doing it the way I laid out. Appreciate further input.
AJ says
Thanks for your input Harry. Are familiar with mysolo401k.net or solo401k.com as an alternative to Employee Fiduciary? They are more reasonably priced and both seemed very knowledgeable when I spoke with the compliance officer at one and one of the principals at the other.
Harry Sit says
Because the stake is high, I wouldn’t go cheap on this. Chalk up the difference of a few hundred dollars a year as your E&O insurance. You want a larger organization like Employee Fiduciary that doesn’t depend on only a handful of people. You want them to take charge as opposed to answering questions on demand only when you know what questions to ask.
Sandeep says
I actually used discountsolo401k and got my plan through them. However, I didn’t feel comfortable managing the plan myself, so I found a third party administrator to manage it after I received the initial plan documents. It costs me $500/year, but I personally think it’s worth it.
Sophia says
I’m also using Discount Solo 401k as well as my self-directed solo 401 k plan document provider, though I don’t have a third party administrator. Discount Solo401k has been good about answering my questions and during set up directed me to a bank that could also handle these kind of accounts. Per Harry’s input, I agree that I would not have done this were I not going to use it annually, at least for a few years. I think the first year was $500-$600 and then there is an annual fee of $100, whereas the prototype plans at brokerages are free/ no start-up or annual fees. On the other hand, if you are somehow in the income sweet spot for after tax/mega-backdoor roth, or have another reason you cannot meet the maximum 401k contributions and want to, the after-tax option is wonderful for letting you max out 401k contributions. As/if your SE income rises, then you might at some point hit the annual max by a combination of your employee contribution (at work in your case) and 20% of your SE earnings for the solo. One thing I haven’t looked into is how difficult it would be to switch back from the self-directed plan to a prototype plan if it eventually was no longer worth the annual fee (that is, if the after tax was no longer needed, etc.). It was quite a hassle for me to get my funds transferred from prototype account to self-directed account and I imagine it might be even harder the other way around. In fact I think one brokerage I checked with told me they would not accept a rollover into their prototype plan from a self-directed one, but I haven’t checked lately.
David Ann Arbor says
It’s probably just a matter of calling Fidelity or going to their office and switching back to their prototype plans. I imagine they’ll just have you fill out forms and move the assets over to their corresponding accounts in the prototype plan.
Mcraepat9 says
Harry, was curious if you knew anything about Ascensus and their individual K document compliance service? I called today and they indicated that their solo 401(k) document service does not permit voluntary after-tax non-Roth employee contributions, so it seems MBR is not an option. That must be a change from when you did this via Ascensus documentation? Or am i missing something?
I have a thread outlining my ongoing experience going on BH.
Harry Sit says
If you want voluntary after-tax non-Roth employee contributions, Ascensus will do it in their “standard” plan. It’s just a different document template.
Now that Employee Fiduciary is offering the full administration service, which wasn’t an option when I started, I would just go to Employee Fiduciary. They’re only a few hundred dollars more than Ascensus and you get everything, not just the document. And you get a larger organization, not just one person. Chalk it up to accessing their professional liability insurance in case something goes wrong. The stake is too high if something does go wrong when you DIY. You’re already saving a lot of taxes with mega backdoor Roth. You want to be sure to keep saving that much year after year and not have it collapse on you.
Always Curious says
First, THANK YOU! The information on solo 401ks and the MBR on this site are the best I have found anywhere. This has been immensely helpful.
Here’s my question: I’m setting up a custom solo 401k account (non-prototype plan). Looking at the forms they mention a bunch of different accounts held within the 401k. These include profit-sharing, elective deferrals, roth deferrals, voluntary (after-tax), transfer, and rollover.
When setting up brokerage accounts is there any advantage to making separate accounts for every type? I was planning to make three accounts:
– Pre-tax (profit share, elective deferrals, transfers, and rollovers)
– Roth
– Voluntary after-tax (for MBR)
Would it be better to make separate accounts as below?
– Profit-sharing
– Elective Deferrals
– Rollovers
– Transfers
– Roth
– Voluntary after-tax
I’ll be keeping detailed records of every contribution, but am not sure if there will be significant differences in how the profit-sharing, elective deferrals, and rollovers are treated when I enter the distribution phase or start filing the 5500ez.
Future rollovers may include traditional IRA and transfers would be a previous employer 401k, if that matters.
Thanks again!
Harry Sit says
The purpose for separate accounts is for tracking different tax treatment and distribution rules. Your three accounts are the minimum for different tax treatment. Further breaking out the pre-tax account into elective deferrals, profit sharing, and rollovers/transfers can enable in-service distributions of profit sharing and rollovers before 59-1/2. If you’ll never distribute/withdraw profit sharing and rollovers before 59-1/2, it’s OK to comingle them with elective deferrals.
If you use Employee Fiduciary for your plan, they will track all these nuance for you. See reply to the previous comment.
Danthony Eadweight says
I’m trying to weigh pros/cons of talking to my employer about setting up a 401k that allows after-tax contributions.
One thing that concerns me, that I don’t see brought up in your great article, is ‘testing.’ I don’t know a lot about the subject, but the company is <8 people, and the compensation varies wildly. While I might choose to max pre & after tax, I could see other employees contributing little to none.
I make about as much through this employer as I do on my own via 1099. A solo 401k seems like it might allow me to put away as much without the risk of failing testing—is there a flaw in that line of thinking?
Harry Sit says
This post is about a solo 401k for the self-employed without employees. Testing doesn’t apply here. This other post The Elusive Mega Backdoor Roth includes discrimination testing in a plan where you work as an employee. It’s very difficult to pass testing at such a small employer. You can try, but it probably won’t work.
Joe says
I was doing some part-time consulting work before, I got an EIN, and set up a solo 401k through Fidelity (I think the account opened is a profit sharing Keogh, in case that makes a difference) to do a backdoor Roth that year. When I filed taxes that year and the following year, there was a Schedule C-EZ for my consulting income those two years. I have since stopped earning income for my self-employed consulting work, and I was wondering:
– Can I contribute to the 401k plan if my self-employed business income is now $0? (I assume no, but just checking)
– Can I still keep my solo 401k plan open? (I assume yes, but just checking)
– When filing taxes, do I still have to file a Schedule C and report $0 income for that self-employed work as long as my consulting business is “open”?
– Do I have to “close” my self-employed business somehow (close the EIN or file any special forms), or can I keep it open and “dormant” in case in the future it becomes active again?
– And if I can keep it dormant, I assume that if in the future I earn income for it again, I would just file a Schedule C that year (and be able to contribute to the solo 401k), right? Or is there anything else if I skip reporting for it for some years while earning $0 for it?
Thanks so much!
Harry Sit says
You can’t contribute to the solo 401k if you don’t have self-employment income but you can keep it open in case you’ll have self-employment income again in the future. You don’t have to file a Schedule C when you don’t have self-employment income in that year. You can keep the EIN in case the business becomes active again. When you have self-employment income again, you file Schedule C again. If your business is registered with the state or county as an LLC, a fictitious business name, etc., you may have to keep renewing your registration.
Joe says
Thank you for your help!
taxsavings says
Can non-Roth after-tax employee contributions in solo 401k come from savings account(after tax money) if pay check contributions not enough?
Harry Sit says
If you’re talking about paychecks from an S-Corp (or an LLC taxed as an S-Corp), no. The contributions must come from paychecks. A sole proprietor or an LLC taxed as a sole proprietor typically doesn’t have paychecks.
Michael says
Hi Harry,
Can you confirm what you mean by: “If you’re talking about paychecks from an S-Corp (or an LLC taxed as an S-Corp), no. The contributions must come from paychecks. A sole proprietor or an LLC taxed as a sole proprietor typically doesn’t have paychecks.”?
Specifically, I have an LLC that has elected pass-through taxation. I would like to use the net operating income from this LLC to do after-tax non-roth contributions to a solo 401k. Are you saying that I would be unable to because net operating income from an LLC that has elected pass-through taxation is not a “paycheck,” or are you only specifically referring to a situation in which you are either an S-corp or an LLC that has elected S-corp taxation?
Thank you!
-Michael
Harry Sit says
Because taxsavings mentioned paycheck, I inferred his or her business must be an S-Corp (or maybe a C-Corp) or an LLC that elected to be taxed as an S-Corp. In that case, the contributions must come from paychecks, not from a savings account.
When your business is a sole proprietor or an LLC taxed as a sole proprietor, the contributions can come from a savings account. The maximum contribution amount is still based on the net profit of the business.
Sophia says
An additional query/ comment: I have heard that Congress is likely to do away with the option of after tax 401 k conversion to Roth IRA and therefore in effect do away with Mega-Back-Door-Roth starting beginning of 2022. It seems that their rationale is that such options benefit the hugely rich. Yet, contrary to that, I think the Mega-Back-Door-Roth can actually be said to level the playing field between people who make more and thus can easily max out the 401 k contribution via 20% of their earned income and those who can only max out the contribution by doing after-tax and conversion to Roth IRA and would be stuck with a lesser contribution (or at least one stuck in after-tax) if the rules of the game change.
Is it worth trying to help Congress understand this (that it’s not just the rich but in fact, some with lower incomes)?
Is the news I’m hearing that this change in the rules is very likely correct? It seems this means those of us who are paying annually for tailored self-directed solo 401 k plans primarily to be able to do the mega-back door roth may want to unwind them. So that raises another question, since the custom plans require a trust and the prototype plans at the brokerage do not, does that mean that we need to close down the plan and start a new one – or could we transform a trust based plan back to a prototype one with no trust (reverse of what some of us did before when we converted our prototype ones to self-directed trust-based ones)?
Harry Sit says
The news is discussed in What If Congress Bans Backdoor Roth and Mega Backdoor Roth?. If it passes, you may consider amending and restating your plan to a prototype plan at a brokerage next year. Or if this is only for a side gig and you have a good 401k plan at a day job, you may also consider terminating it and switching to a SEP-IRA. The maximum employer contribution to a solo 401k and to a SEP-IRA is the same. I’ll write a new post about this if it goes that way.
John says
Hi Harry,
Great article. Had a question. Who maintains beneficiary document, plan provider or financial institution where account is maintained. In case plan provider maintains beneficiary document, and is comparatively small firm, how to ensure spouse and kids inherit, after plan administrator / trustee passes away.
Which authority governs beneficiary documents, in case plan providers are not reachable, as a fall back option.
Does custom plans need to be ERISA compliant or governed by ERISA rules.
Harry Sit says
The Plan Administrator maintains the beneficiary document. The employer is the designated Plan Administrator in many plan documents.
ERISA doesn’t apply to solo 401(k) plans.
John says
With Solo 401K plan and two trustee with Ascensus, how is TD Ameritrade account titled. Any due diligence or let TD
1. Title in A/c
1.1. A/c 1. Trustee 1 Trustee 2 for Plan name F.B.O. Trustee 1
1.2. A/c 2. Trustee 1 Trustee 2 for Plan name F.B.O. Trustee 2
2. A/c Opening form section Trustee and Co-trustee
For 1.1 and 1.2 A/c, one has to provide both trustee and Co-trustee name along with their ssn or 1.1 with Trustee 1 only and ssn.
Harry Sit says
If the plan has two trustees, both of them should be listed. The individual accounts are for the participants. Imagine if you hired professional trustees. The accounts should be [Plan Name] FBO [Participant 1], [Plan Name] FBO [Participant 2], etc. The professional trustees are responsible for the entire plan.
John says
Hi Harry
With custom Ascensus Solo 401K plan and two trustee, how is TD Ameritrade account titled. Any due diligence or let TD determine how title:
1. A/c Title with Plan EIN
1.1. A/c 1. Trustee 1 Trustee 2 for Plan name F.B.O. Trustee 1
1.2. A/c 2. Trustee 1 Trustee 2 for Plan name F.B.O. Trustee 2
2. A/c Opening form section Trustee and Co-trustee
For 1.1 and 1.2 A/c, one has to provide both trustee and Co-trustee name along with their ssn or 1.1 with Trustee 1 only and ssn.
or A/c title need to be setup with Plan EIN as:
3.1. A/c 1. Plan name F.B.O. Trustee 1
3.2. A/c 2. Plan name F.B.O. Trustee 2
with blank Trustee and Co-trustee information and no social
Harry Sit says
Again, imagine you hired third-party professional trustees. The accounts are owned by the plan, with the plan’s EIN. They are for the benefit of the participants (not trustees). So they should be [Plan Name] FBO [Participant 1], [Plan Name] FBO [Participant 2], … The custodian needs to know who the trustees are and therefore who have the authority to act on behalf of the plan. Whether the custodian actually lists the trustees together with the plan name in the account title itself is up to the custodian.
Jim says
Hi Harry, great info on this site! You wrote that the solo 401k brokerage plans (from Fidelity, Vanguard, etc) do not allow after-tax contributions to be able to even do a mega Roth conversion. This is a simple/silly question, but why can’t one contribute to the solo 401k held at one of these brokerages and then not deduct it? Would that not become a non-deductible contribution that you could then convert into a Roth and track the basis (like for a backdoor Roth IRA)? Sorry if I am missing something with trying to do a mega Roth starting with a solo 401k and a simple process (like you would do for a backdoor Roth at these brokerages). I know you went through all of the steps you described you had to do, so I was just wondering. Thanks!
Harry Sit says
You can do Roth contributions up to the $19,500/$20,500 limit in a Vanguard plan. Even if you don’t deduct the employer profit-sharing part, it will still be 100% taxable when you convert it to Roth. No one wants to pay tax twice.
Avi says
You have to keep in mind that a 401k plan is a more complex entity than an IRA, designed in law to be managed by companies with lawyers specialized in its intricacies.
The structure of a particular 401k plan guides what types of contributions are allowed in that plan. If the plan doesn’t allow for after-tax contributions (which are different from Roth contribution) then there is nothing you can do to make them permitted (save changing the plan documents).
Even if you didn’t deduct them on your personal taxes, they would still be pre-tax employee or employer contributions and would be taxable on any conversion to a Roth account (which also may or may not be allowed by the plan documents).
You need to get it out of your head that anything to do with managing a 401k plan is simple – there are enough off the shelf options to make the basics of it easy, but the tax and labor law behind is anything but simple.
Sophia says
Here is my understanding: The type of contributions you make are governed by the “plan document.” The brokerages have their own prototype plan document that you must use if you want to set up specified solo 401k accounts with them. And I don’t think any of them allow for after-tax contributions (though I have not checked recently). In fact, I think Schwab in the past did not even allow for Roth – maybe they do now.
Many who see a real advantage to mega-back-door Roth use third parties that have plan documents allowing after-tax, but then you have to get different types of accounts with the brokerages to suit this situation. The problem now is that we don’t know if build back better (or something else that comes along) will outlaw mega-back-door Roth (the latest version of bbb has this in there and it’s expected to stay in there). If mega-back-door Roth is outlawed and that would be your main reason to pay for a third party plan, it may not make sense to do it as there is some cost involved, such as $500 to $600 at startup and $100 annually for updates to the documents, whereas the brokerages do not charge for documents or their updating.
Kevin O says
Hi, Harry-
E*Trade has revised their Individual 401k Plan Documents to allow non-Roth after-tax contributions. In 2021, they made me restate my Individual 401k to comply with new IRS rules, and the restated Basic Plan Document (sec. 3.05) and the restated Standardized Adoption Agreement (sec. 3, Part C) allow non-Roth after-tax contributions. They call them Nondeductible Employee Contributions.
Their Individual 401k has one account for pre-tax contributions and a second account for Roth elective deferrals. However, they told me that they will not allow me to open a third account for the non-Roth after-tax contributions.
E*Trade believes I can do a Mega Back Door Roth without having a separate account for the non-Roth after-tax contributions. They said I would have to make the non-Roth after-tax contribution to the pre-tax account, and then do an in-plan rollover of such contribution (and any earnings thereon) to the Roth account. And if I do it immediately after the contribution, there might be no earnings thereon. They said I would be responsible for keeping track of such contribution and the earnings thereon.
Harry, my questions are:
1. Since E*Trade won’t let me open a separate brokerage account for the non-Roth after-tax contributions, can I still do a Mega Back Door Roth?
2. If I can do a MBR, can I do an in-plan rollover of just the non-Roth after-tax contributions (and any earnings thereon) from the pre-tax account to the Roth account? Or would the IRS rules require me to rollover the entire pre-tax account, in which event, could I: (a) rollover all the pre-tax contributions (and any earnings thereon) in the pre-tax account to a Traditional IRA, and (b) rollover all the non-Roth after-tax contributions (and any earnings thereon) in the pre-tax account to the Roth account?
Thank you very much for your guidance.
Harry Sit says
It appears E*Trade updated their document to support Mega Backdoor Roth but they haven’t updated their operations to support it yet. Their suggestions are only hacks. I wouldn’t be comfortable using them.
If you really want Mega Backdoor Roth, go to Employee Fiduciary, pay their $500/year fee, and do it right. If the $500 fee makes it not worth it, don’t do it.
Kevin O says
Harry, thanks for your reply.
John says
In custom Solo 401K plan, we did In-plan Roth conversion from After-tax to Solo 401K Roth A/c # 1 for 2K and A/c # 2 for 5K respectively for two beneficiaries.
I have question regarding 1099-R:
1. To report in-plan Roth conversion, I need to file two 1099-R for each beneficiary?
2. My understanding is that Payer’s TIN and recipient’s TIN is of Plan trust for both beneficiary’s 1099-R. Is my understanding correct?
3.1 If recipient’s TIN is that of plan and is same for beneficiaries, how is 1099-R distinguished for both beneficiary’s A/c # 1 and A/c # 2.
3.2 1099-R should be
Payer’s name – “Plan name”,
Receiver’s name – “Plan name”
or 1099-R
3.3 Payer’s name – matching A/c title – “Trustee 1 Trustee 2 FBO Plan name FBO Trustee 1”
Receiver’s name – matching A/c title – “Trustee 1 Trustee 2 FBO Plan name FBO Trustee 1”
And
Payer’s name – matching A/c title – “Trustee 1 Trustee 2 FBO Plan name FBO Trustee 2”
Receiver’s name – matching A/c title – “Trustee 1 Trustee 2 FBO Plan name FBO Trustee 2”
respectively.
Harry Sit says
First of all, terminology. The persons with accounts in the plan are plan participants, not beneficiaries. Beneficiaries are the persons who will get the accounts in case a participant dies.
Second, the 1099-R forms were due to the participants on January 31. You’re already late.
Third, it makes no sense to issue a 1099-R to the plan itself. The recipient on each 1099-R should be the participant, with their name, address, and Social Security Number. The participant will receive the 1099-R and report it on their personal tax return. I don’t know why you have account #1 and account #2 but if you’d like to issue two 1099-R’s to each participant, there’s an account number field on the form to distinguish one account from another and it only costs $3 a piece to issue a separate 1099-R for each account versus combining them into one.
John says
Thanks for your reply and input. Please let me know if below understanding is correct.
I have setup Trust’s EIN for Solo 401K Plan. Solo 401K After-tax A/c and Solo 401K Roth A/c are under Trust’s EIN.
1.I thought in my case in-plan Roth conversion is done and funds are staying within the plan (Solo 401K After-tax A/c to Solo 401K Roth A/c), not going to individual Roth IRA. This will be trustee-to-trustee transfer, that is why recipient name should be Solo 401K Plan Name, with Distribution code G in box 7, with A/c number.
2.Once above is done, in future I will rollover funds from Solo 401K Roth to Individual Roth IRA, in that case recipient on 1099-R should be the participant, with their name, address, and Social Security Number, Distribution code 2 in box 7, with A/c number.
Harry Sit says
Not correct. The participant should be the recipient in both cases.
John says
Thank you Harry.
Alex says
Hey Harry,
If I had before tax funds in trad IRA and roll them over to Solo 401(k) do I need issue 1099-R and file taxes or I don’t need do anything?
Harry Sit says
The IRA custodian issues the 1099-R. You include it on your tax return.
Mark J says
Hi Harry,
my wife and I have a solo 401k for 2 years now, with Schwab, coz we both had 1099 income then. now my wife only has W2 income and I still have both W2 and 1099 income. so she isn’t contributing to solo401k anymore. I still contribute to it, but we always convert all of it to my roth IRA, via megabackdoor roth ira conversions.( I did that for my wife too, when she used to contribute to it).
so essentially, we both have zero dollars in the solo 401k, and all the money is the Roth IRA. however, I still pay yearly maintenance fees to this 3rd party company, that initially set up the solo 401k for me. I read in your article one can manage the account himself. can I do that with my account as well, given my situation? (essentially, I want to stop paying maintenance fees to this 3rd party company). I plan do keep doing MBDRoth IRA every year, and keep no money in my solo 401k accounts. please advise. thank you.
Harry Sit says
I don’t know what this 3rd party company does or how much you’re paying but you’ll still need to keep paying a third party to maintain the plan document when you want to continue the mega backdoor Roth.
Sophia says
Yes, I understand for compliance they have to update the solo 401k documents every six years or so and that’s why you couldn’t just leave your 3rd party provider and go on indefinitely without them.
John says
Hi Harry
With 3rd party custom plan does TD Ameritrade allow past Dec 31, 2022 to continue contributing to Solo 401K mega backdoor Roth.
If no, by any chance is there a list of account provider for above.
Harry Sit says
When you have a third-party plan, the custodian doesn’t know or care about the type of contributions you put into each account. They only handle the investments. The plan administrator tracks taxes. If you have a TD Ameritrade plan now, you may need to open new investment-only accounts for the third-party plan.
John says
Hi Harry
I have a question on Form 5500-EZ Part III. 6a total plan asset:
Does total plan asset (6a) include total value of multiple sub-accounts (e.g. Solo 401K After-tax, pre-tax, Roth) or just Solo 401K pre-tax.
Thanks
John
Harry Sit says
All sub-accounts.