At the end of 2014, I amended and restated my solo 401k plan from a prototype plan sponsored by Fidelity to a prototype plan sponsored by Ascensus. I did that in order to enable non-Roth after-tax contributions for so-called mega backdoor Roth. See previous article Mega Backdoor Roth In Solo 401k: Control Your Own Destiny.
It’s been one full year. I went through the complete cycle from making the non-Roth after-tax contribution, distributing such contribution and earnings to a Roth IRA, to finally issuing a 1099-R as the plan trustee. This article documents the whole process. It will remind me what to do in the years to come. It also shows how it’s done in case others are interested.
I play four different roles in my solo 401k:
- as an employee participating in the plan;
- as the employer sponsoring the plan;
- as the plan administrator administering the plan;
- as the plan trustee investing plan assets.
I sign different documents, sometimes the same document twice, depending on which role I’m playing.
In a workplace 401k plan, you go to a website or you fill out a form to indicate how much you want to contribute to your 401k plan. For my solo 401k, I created a paper form as the plan administrator. I then filled it out as the employee and gave it to myself as the plan administrator.
Because I’m contributing my $18k to the plan at my day job, I chose to contribute 100% of my self-employment income as non-Roth after-tax contribution to my solo 401k. The election I made will stand for future years until I change it.
My plan assets stayed at Fidelity. I opened new investment-only retirement accounts at Fidelity, one per participant per contribution type. I transferred existing assets to the new accounts.
I had to get a separate EIN for my plan. I already have an EIN for my business, but my business doesn’t own these accounts. When I had the plan under Fidelity’s prototype plan, Fidelity Management Trust Company (FMTC) was the trustee. The accounts were held in trust by FMTC. Now that I’m on my own, I needed an EIN for the plan itself.
Getting an EIN was quite easy, and it was free. I did it online with the IRS.
After I closed my books for the year, I used my spreadsheet Solo 401k Maximum Contributions to calculate how much I was allowed to contribute to my solo 401k. I created another form as the plan administrator to document the contributions by contribution type (employee after-tax versus employer profit sharing).
I sent a check to Fidelity together with its Investment-Only Retirement Account Contribution Form, which broke down the contribution to each account.
After the contributions were credited to each account, I logged in to Fidelity as the plan participant and I invested the contributions. This was no different than buying mutual funds or ETFs in a brokerage account.
As part of the document package, Ascensus included a distribution request form and the IRS-mandated special tax notice. As the plan administrator I gave myself (the plan participant) the special tax notice together with a blank distribution request form. I filled out the distribution request form as the participant, requesting a direct rollover of the non-Roth after-tax contributions and earnings to a Roth IRA. I approved the distribution request as the plan administrator.
I then sent an Investment-Only Retirement Account One-Time Withdrawal Form to Fidelity. I already had a Roth IRA at Fidelity. I simply chose to distribute the entire non-Roth after-tax account (but leave the account open for the next year) in-kind as shares to the Fidelity Roth IRA.
After the shares were rolled over, I printed the transaction history that showed the value of the gross distribution and the original non-Roth after-tax contribution. The small amount of earnings would be taxable.
When you do a rollover from a workplace 401k plan, the plan administrator will report it to the IRS and send you a 1099-R. When I’m administering the plan myself, I’m responsible for issuing the 1099-R and reporting it to the IRS.
I had to figure out what to put where on the 1099-R. The IRS has Instructions for Forms 1099-R and 5498. I read the first 17 pages for 1099-R. The pertinent part for what I needed to do is in just one small paragraph on page 5:
For a direct rollover of an eligible rollover distribution to a Roth IRA (other than from a designated Roth account), report the total amount rolled over in box 1, the taxable amount in box 2a, and any basis recovery amount in box 5. (See the instructions for Box 5, later.) Use Code G in box 7.
It’s all in the instructions. The hard part is to separate the wheat from the chaff and figure out which part applies. If I contributed $10,000 as non-Roth after-tax and I distributed $10,100, it’s just
- The plan’s name and EIN as the payer
- My name and SSN as the recipient
- 10100.00 in box 1
- 100.00 in box 2a
- 0.00 in box 4 (no federal tax withheld)
- 10000.00 in box 5
- code ‘G’ in box 7
- 0.00 in box 12 (no state tax withheld)
Once you know what to do, actually issuing the 1099-R is easy. I created an account at tax1099.com. They e-file 1099-Rs with the IRS (and some states) for $2.90 per form. I filled out the form visually. They would do the rest. I downloaded copies for the payer (the plan) and the recipient (the participant) as PDF files.
For $195 per year paid to Ascensus for document maintenance plus minimal cost for postage and issuing the 1099-R, I was able to put an extra chunk of money indirectly into my Roth IRA. It was quite worth it. Obviously if you want to play plan administrator and plan trustee yourself you have to know what you are doing. As the plan administrator and the plan trustee you also have other duties besides what I wrote in this article. If you don’t know how to play these roles, you can get help from a TPA (third-party administrator) for a few hundred dollars per year.
If your self-employment income is in the right range — not too low, not too high — it can be worth it to enable the mega backdoor Roth option in your solo 401k. You can use my spreadsheet Solo 401k Maximum Contributions to find out how much room you have for non-Roth after-tax contributions and then decide whether it’s worth the effort and the cost.
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