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.
Elect Contribution
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 a non-Roth after-tax contribution to my solo 401k. The election I made will stand for future years until I change it.
Send Contribution
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.
Invest
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.
Request Distribution
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.
Issue 1099-R
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 the 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, you have to know what you are doing if you want to play plan administrator and plan trustee yourself. As the plan administrator and the plan trustee, you also have other duties besides what I wrote in this article. Laws and regulations are complex. There are many ways to mess up. Get professional help if you’d like to pursue this option.
Employee Fiduciary can include non-Roth after-tax contributions in their solo 401k plans. They charge a $500 setup fee and $500 in base administration fees plus 0.08% of plan assets 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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LiveFreely says
Thank you for the very nice write-up as I am interested in the mega backdoor Roth as well. I have a full-time day job, but also have some unpredictable self-employment income. In the post, you mention that it might be worth it if the self-employment income is in the right range – not too low or too high. Can you please give some specific numbers? What level of income is considered not too low, and is still worth the hassle of establishing the mega backdoor Roth in solo 401k? Thank you very much for your insights!
Jon D says
Over ~$200k in net self employment income could make the value of this strategy a moot point given other options.
Under ~$10-15k (if you have a full time W2 day job) in net self employment income would likley be considered too low given expenses, hassles, etc.
^There could be exceptions to both of these. I can think of some, but these are some reasonable guidelines.
Also it’s only worth while if you’ve used up all other alternatives (such as your elective deferral at work or in your own plan).
Harry Sit says
LiveFreely – Use the spreadsheet linked at the end. Cell F29 shows the extra amount you can put into your Roth IRA indirectly via this move. I would say if it’s under $10k it isn’t worth the cost and effort. For someone with a day job and contributing the $18k max to the plan at the day job, Jon D’s range is about right. For someone only with self-employed income, the range is much narrower. It’s about $40k to $130k.
whynoteforme says
Will someone please explain why having a high income from self-employment makes this option a moot point given other options? I know I can put 53k away pre-tax without it. And I know that otherwise that 53k is taxed at my marginal income tax rate. But isn’t there the risk that future income taxes will be higher than my current marginal tax rate? It seems like we are at historic lows for top tax rates.
Mike A says
whynoteforme, If you have a high self employment income (over $200k) you can just do 25% profit sharing and hit the $60k plan max so the mega backdoor is not needed to max out the plan.
whynotforme says
Hey Mike A thanks for the reply! But I guess my question is even if I can max out a solo401k plan, wouldn’t it be better to have that 58k max amount in a roth so that it grows tax-free?
Jon D says
Some key questions:
1) I’ve received opinions that in the case of a I401k there is no need for a separate EIN for the plan using this exact structure (doc service elsewhere, pension accounts from custodian). Another custodian agreed to take one without a separate EIN to “establish a trust”. Business EIN was sufficient. Can you comment on the legality of this?
2) How important do you think maintaining deferral paperwork is with a I401k (assuming you don’t have pre vs post December 31st payroll period contributions)? Do you think payroll, transaction history, statements, and W2 all lining up and the fact that employee is also trustee is sufficient proof of intent to contribute?
3) Any chance you can post a copy of the ascensus distribution form and IRS tax notice?
Harry Sit says
1) The custodian will take it when they don’t do any tax reporting on the accounts. The question is when you issue a 1099-R for the distribution, whose tax ID you will use as the payer. The business isn’t paying you that money. The plan is. EIN is free. There’s no reason to skimp on it.
2) When it comes to paperwork, the more the better. The contribution election has to be made before the end of the year. The best way to document it is just a piece of paper signed by you the participant. It’s free. If you want to contribute the maximum just say “100% of my pay subject to limits set by law.”
3) I can’t post the form. The special tax notice is IRS standard text.
https://www.irs.gov/pub/irs-drop/n-14-74.pdf
Eric says
I really LOVE this article, especially the 1099-R explanation. That’s one of the harder things in this process to understand. I went through the process of setting up a non prototype plan recently using your other article as a guide and using Nora (who you referenced) to help in the process. I would not have known where to start without your posts explaining the process, so THANK YOU!
Khad says
When I set up my Individual 401k with Vanguard, it was much simpler than what you describe. But apart from that, is there any reason to go through all that trouble versus simply making Roth contributions to my Individual 401k?
Jon D says
What he is doing is for those that run into the maximum contribution limits and want to save more.
Vanguard’s plan doesn’t allow what he’s doing.
Khad Young says
Maximum contribution limits to what? Roth IRA? Roth Individual 401k? Just trying to figure out if any of the above would be helpful to me or not. I don’t believe it would be, but I appreciate the confirmation. Cheers!
TJ says
Both! He’s maxing out $18k at work. The Mega Backdoor is in addition to any standard 401k and IRA space.
Khad Young says
Got it. Thanks a lot, TJ. (And Jon D.) I guess I don’t have to worry about this quit yet. The hassle of it all sounds like a good problem to have, though, if and when I get to that point.
TJ says
It is frustrating that the self employed get significantly more tax avoidance opportunities. Why can’t we just have the same limits for everybody?
Harry Sit says
It actually is the same limit for everyone. You just need a better employer. The previous poll showed that 40% of readers had access to mega backdoor Roth.
Sit says
Harry – I read you have used new EIN for the plan, I am little confused, I used my business EIN when I setup my plan with Ascensus and funded elective and nonroth accounts, Have I done anything wrong? would i have difficulty making the rollover to RothIRA and issue 1099-R to myself? I am yet to rollover nonroth. Thanks in advance!!!
Sit says
Note: It’s a single member s-corp
Sit says
What in case of a big company offers nonroth on their 401k plan, how the 1099-R issued when an employee make a distribution when he get a chance?
BRogers says
“As the plan administrator and the plan trustee you also have other duties besides what I wrote in this article.”
How difficult are these “other duties” and how would one go about learning how to do them? I’d like to utilize a Mega Backdoor Roth in my Solo 401k this year but am undecided whether I should attempt this myself or get help. I’ve been contemplating this ever since your previous, inspiring posts on the Mega Backdoor. This post had me decided to pull the trigger, until that penultimate warning paragraph anyway…
Jon D says
Get help. Learn how they do it as they do it and then decide if you want to start doing it yourself after you understand it.
Harry Sit says
Even when you use a TPA, you are still the official plan administrator and plan trustee. You will see what the TPA puts in front of you. After it becomes a routine in a year or two, maybe you will be able to attempt it yourself.
Kate says
Hello,
I have a questions regarding your backdoor Roth article from 12/2014 (but can’t comment on that thread).
Questions regarding step 1.
1. How does one figure out how much of the traditional IRA is pre tax (vs. non deducible contributions) money that can be placed into the 401K (figure 1)? Is that something that fidelity tells you?
For example, if I have a tIRA for 5 years and there are some dividends and interest that I have accumulated over these last 5 years, how do I find out what that amount is when everything is invested back into the pot?
2. Is it possible to just empty of all the money from the traditional IRA into the 401k, without divvying up the pre tax and non deducible contribution? What are the pro/cons if this method (besides paying tax for the second time when distributing years later)?
Thanks, sorry to hijack this thread.
Jon D says
It’s supposed to be tracked on your tax return or your not doing it right.
It’s form 8606. Ask your accountant about it.
Andy says
If there’s a capital loss when the distribution is done, is the loss tax deductible?
Jon D says
No.
If you’re handling it yourself the distribution should be pretty quick after contribution and not much should have changed in value.
Sit says
Harry – I read you have used new EIN for the plan, I am little confused, I used my business EIN when I setup my plan with Ascensus and funded elective and nonroth accounts, Have I done anything wrong? would i have difficulty making the rollover to RothIRA and issue 1099-R to myself? I am yet to rollover nonroth., it’s single member s-corp. Thanks in advance!!!
Harry Sit says
I took the trouble in getting a separate EIN for the plan because I believe it’s the right setup. It takes 5 minutes to request an EIN from the IRS and it costs nothing. I don’t understand the hesitation of just getting one for the plan. If you already used the business’s EIN to open accounts with the custodian, you can always have them change it after you get the new EIN.
sit says
In case of a major company offering nonroth option + a in-service distribution option – Any idea what an employee updates on box 1 (Payer) when issuing 1099-R?
Harry Sit says
Just received a 1099-R from a major company’s plan. It had Fidelity Investments Institutional Operations Co. as the name of the payer. The EIN presumably belongs to this Fidelity entity. It’s not the same as the employer’s EIN on the W-2.
Thinksnow says
I currently have a W-2 job where I am maxing out my elective 401K contribution. I am starting a side consulting job and unsure at the moment how much I will earn. Am I correct in thinking that i can establish a solo 401K with Ascensus later in the year if my consulting income becomes enough to justify a solo 401k with after tax contributions? I believe I just need to establish the plan and make the election before 12/31/2016 and it does not matter when in the year I earn the income.
Harry @ RSG says
This is great, I think I’ll be able to use this. I have an llc as s corp for 2016 and I’m about to set up a solo 401k for it. I don’t have any w2 income and I’ll be paying myself $50k from my s corp.
From your spreadsheet, it looks like that means I’ll be allowed to defer $18k of salary plus $12.5k of profit sharing plus $19.5k roth contribution.
1. It sounds like it’s worth it for me right? So if I want to get help I need to find a TPA? I e-mailed Nora but never got a response. Any other options/leads?
2. I also have my wife who I may be hiring for 2016 and could pay her a salary of $24k (just enough so she can defer $18k and profit share $6k), would I get to do $19.5k roth for her too and how would that change things?
Harry Sit says
Just to be clear, that’s 19.5k non-Roth after-tax contributions, to be distributed to a Roth IRA. Plug her income into the spreadsheet. I assume she has another job. Is she deferring $18k there? The spreadsheet will tell you what she can do.
Harry @ RSG says
Yes that’s correct, I’ll do $19.5k non-roth after tax contributions to be distributed to my roth IRA (this is the mega backdoor roth part right).
I can also do a regular backdoor roth ($5.5k per person) too right?
My wife is a student, so no day job income.
Harry @ RSG says
Update, spoke with Nora, she was having e-mail problems so follow up if you never get a response 🙂
This seems like an absolute no brainer for me, I’m trying to find the downside. I have no day job income and if I pay myself $50k w2 income from my biz, I can defer $18k + $12.5k profit sharing with a solo 401k.
If I set up a solo 401k with a TPA (Nora’s company would charge $775 setup plus around $4-500/year ongoing), I would then be allowed to roll over $19.5k to a Roth!
Using your spreadsheet from another post, at an 8% return over 30 years, from just ONE year of contributions, I’d make $43,000 more vs investing that same money in a taxable account. Is there any reason not to do this?
Harry Sit says
No. That’s why I’m doing it.
JR says
I just started a job last year where I am paid through an S-corp in Texas. I am paid $167,500 through W-2 and $167,500 through K-1 distributions (both pre-tax and pre-expenses–S-corp “makes” $335,000 per year). I also started a solo 401k at TD Ameritrade (which I plan on maxing out at $53,000 per year–18k as employee and 35k as employer profit sharing). Would it be worth it financially for someone in my situation to move and restructure my solo 401k to allow for non-Roth after tax contributions (in order to make mega backdoor roth contributions)? I looked at the spreadsheet you have on the blog, but I’m not sure what qualifies as “compensation from self-employment” (just W-2 income or W-2 and distribution income [K-1])? Thanks in advance for your response.
Harry Sit says
In your case no, because you are already able to contribute enough pre-tax.
harry @ rsg says
I was planning on doing this for myself this year for my llc as s-corp. I was also planning on hiring my wife and paying her $24k so we could deduct $18k + $6k. Still have to pay payroll taxes on that $24k but allows us to get extra pre-tax deferral.
Now if I paid her say $40k instead, we could defer a total of $28k leaving $12k which would mean we could do the mega backdoor roth for her too on that $12k. So my question is, is it worth it ?
Seems like it is since if I use your solo 401k vs taxable calc, and compare $12k roth vs $13,800 ($12k + additional payroll costs of 15% x $12k) taxable investment, we’d still come out about $10,000 ahead over 30 years.
Harry Sit says
If she earns more than the Social Security wage base, the payroll tax is only 2.9%. Try to get at least one of you over that number from all jobs, currently $118,500.
rj says
Harry – It’s about new EIN for the plan.
Are these the right steps to be followed for new EIN for retirement plan and relate to the existing business? and this new EIN is the one provided to Ascensus for setting up the 401k plan? Please advise me. Thanks,
EIN application online has ‘View Additional Types, Including Tax-Exempt and Governmental Organizations’ —> Employer Plan (401K, Money Purchase Plan, etc.), it say – ‘If you already have an EIN for your business, you can use that EIN or you can apply for a separate EIN. Please consult with your retirement plan professional to determine whether you need a new EIN for your plan.’,
On next pages, looking for responsible parties -individual/existing business; if you choose ‘Existing business’ and provide name of existing business and EIN and then select ‘I am the owner, trustee, or plan administrator for this plan’, it seems it’s going to create a new EIN for the retirement plan and it’s correlating to the business;
Harry Sit says
View Additional Types -> Employer Plan -> Continue (because you determined you need a separate EIN) -> Individual (because you are the trustee) -> I am the owner, trustee, or plan administrator for this plan.
rj says
Harry – Can you list how do you get a separate EIN? I did applied for my business earlier and was easy, but this time none of the options on the online EIN application form is relevant to get a separate EIN, got little confused? Can you share your thoughts? missing this last part.. Thanks,
isaac says
Harry, great post again! one question: you said that you changed your solo 401k plan from Fidelity to Ascensus. What’s the reason for the change? Can you clarify this, I thought you use Ascensus just for document purpose. By the way, I also read your previous posts on the topic and know the basics. Thanks.
Harry Sit says
That’s the reason. Fidelity’s bundled plan has Fidelity documents. If you want non-Roth after-tax contributions you have to get a different document. Ascensus provides one. See link in the opening paragraph to the previous article.
isaac says
Thanks for immediate response. so after the “change”, you got the Plan Document and Adoption Agreement from Ascensus modified for the Non-Roth purpose to set up Fidelity Small business Investment-Only Retirement Accounts. Am I understanding the process correctly? are those accounts you opened all 401K accounts or other types? Sorry I was confused on this. Thanks for replying.
isaac says
Also I thought the Fidelity retirement account is free (except investment fee) as it states “None account opening and annual maintenance fees” in its web site. However, based on Brian Hogan, Director of Small Business Retirement Products at Fidelity Investments, “for a Simple IRA, the majority— we charge a $350 plan fee here at Fidelity. …..With a 401k plan, you’re going to pay a lot more administrative fees for testing, for loans or any other features that you add to a 401k plan…..” http://www.doughroller.net/retirement-planning/retirement-plan-options-for-small-businesses/ I have other retirement accounts with Fidelity, but never noticed the administrative fee. Did I misunderstand the web site or what Brian Hogan said?
Harry Sit says
That’s correct. Take a look at Fidelity’s investment-only account application (link on the Fidelity web page). The accounts are in the name of the solo 401k plan FBO each participant (option B in the account application) — actually multiple accounts for each participant for different contribution types. See previous article about pooled account versus FBO accounts.
Fidelity doesn’t charge administrative fees on the investment-only accounts, because Fidelity doesn’t administer the plan when the accounts are investment-only. You pay administrative fees to a third-party administrator you hire on your own, for instance Nora in the previous article.
SIMPLE IRA is a different type of plan. Fidelity administers it. Its fees of $350 per plan plus $25 per participant are clearly disclosed on Fidelity’s web page on its SIMPLE IRA plan.
isaac says
Harry, you are right. Thanks.
isaac says
Hi Harry, why you need to pay Ascensus for yearly maintenance fee (same with the first year’s setup fee)? The Revenue Procedure 2007-44 requires that 401(k) plans shall be amended and restated every six years to conform with current law. What about you pay the first year, and other years as needed? You know what I mean, every penny is hard-earned (though not to all the people).
Harry Sit says
Isaac – Because I’m using Ascensus’s prototype plan. Ascensus maintains it. As a condition of using its prototype plan, Ascensus charges the maintenance fee. The only way to avoid it would be not using Ascensus’s prototype plan. Drafting your own custom plan costs more money up front. Adopting a different prototype plan, such as the one from Fidelity or Vanguard, does not give me the features I want.
Anonymous says
If I open 401 K solo for megabackdoor roth in Fidelity myself,because now last minute noTPA is ready to help and I accept Fidelity plan and administer myself then:
1) Who prepares the documents—Fidelity form I can use, right?
2)when to file 1099R s if I am doing all this in last week of December 2016? Can I do that in January 2017?
3) Because I will be the trustee, will need to file form 5498SA, do I have to file that before 31st December 2016?
Please Harry, help me on these questions sothat I can do this before Dec31st of this year.
Harry Sit says
If you use Fidelity’s plan it’s not possible to do mega backdoor Roth.
IMDoc says
Did you contribute 100% of your earnings as non-Roth after-tax (vs some as pre-tax profit-sharing) for simplicity? My tax rate is such that I’d like the tax deferral of the PS, but do wonder if two different kinds of contributions will make this unnecessarily complicated (esp since the PS will only be roughly $11,000). Thanks for your excellent article on this. It helped me take the plunge into a Solo at Employee Fiduciary this year.
Harry Sit says
I still did employer pre-tax profit sharing. I only meant 100% of the employee contributions were non-Roth after-tax. Since you already have Employee Fiduciary as your administrator, they can deal with two types of contributions easily.
Lori says
I’ve opened the Fidelity non-prototype accounts using Ascensus plan documents. Your articles have been invaluable.
Is it correct that I can deposit the business profit-sharing funds after I close my books in January, yet this is still a 2016 business deduction?
And, for after-tax contributions, does it have to be deposited (not just elected) before Dec. 31? I have a letter stating I elect all of my 2016 income to be after-tax contributions to the 401(k), just wondered if there is a deadline to deposit the funds (like in same month income was earned, or other?)
Finally, in 2017, should I be contributing after-tax several times a year as I accumulate income, or wait until the end of the year when I have my complete profit/loss picture?
Harry Sit says
You should work with an administrator who can answer these and other questions. Following the right procedures will make your plan stay complaint with the rules. Profit sharing contributions are deposited after profits are determined, before filing taxes. If you run payroll, the employee after-tax contributions should be deposited shortly after payroll, just like when you work as an employee. If you don’t run payroll, it can be done after the books are closed.
Thinksnow says
Harry, thanks for the incredible work on this. I am just about to finalize my plan documents with Ascensus. In my document package I received only two forms/notifications:
1) Notice of Qualified Default Investment Alternative(s)
This form has a bunch of blank spaces to fill out the plan default investments.
2) DISTRIBUTION NOTICE
8 page document with “Important Information About Your Qualified Retirement Plan Distribution”
I didn’t receive a separate distribution request form. Is this something you specifically requested?
Harry Sit says
After you finalize the documents you will be given access to a client-only area with additional forms and documents to download.
Thinksnow says
Harry, I got my plan setup, made my election, accounts setup at Fidelity, and made my contributions. Now I am looking to distribute the non roth portion. I don’t think I was ever given access to an additional location for forms besides the public location here:
https://dcs.ascensus.com/EmployerDirect/ancillary-forms
I also have access, to my plan documents, but they don’t include the distribution form. I can call Ascensus on Monday to find out. Let me know if I am missing something obvious.
Are you doing a distribution this year or in plan roth conversion? I can do an in plan conversion, but a distribution is a bit more flexible and delays needing for file a 5500-ez a bit longer.
Harry Sit says
I see it’s available here:
https://dcs.ascensus.com/lpl/document/download/application-for-distribution.pdf
I do distribution to Roth IRA.
Vanita says
Hi Harry,
Thanks for an awesome article. I am still trying to understand it. I am the owner of a small company and my husband is a partner in it. We do have solo 401k account and we do try to maximize the employee contribution. I don’t take a salary but my husband does. Maybe if we both took a salary of at least 60-80,000 then we can do 24,000 for employee and then add profit sharing and still add a backdoor IRA . Am I correct in assuming that
Thank You
Thinksnow247 says
What business structure do you have? Are you an S-corp? I ask because you say salary, but that you are not taking one. How are you payed?
Vanita says
Hi ,
We have a S corp.
Thanks
Thinksnow says
Is there a reason you don’t take a salary? If you work for the s corp and you were paid a shareholder distribution you need to a take a reasonable salary according to the IRS. You should likely review your current practice with a CPA as no salary from a S corp is a big red flag.
Work with a CPA to determine the lowest reasonable salary you should take. You then need to determine if you should take a higher salary to allow a larger profit sharing contribution beyond maxing elective deferrals. You need to run the numbers. Calculate your tax return for different scenarios.
A solo 401k with after tax contributions is another tool you may be able to use. If it is not worth increasing salary to increase profit sharing, you are still able to fill tax advantaged as long your salary is more than the 54k (or 60k with catch-up)
Vanita says
Hi Harry,
Our taxes are filed each year by a well known CPA here in town. I may been off cuff regarding the S corporation because I only do the clinical aspect of it and my husband wasn’t sure when I asked him about the clinic .I will check with my CPA and get back to you. He is the one who structured the solo 401K.
Harry Sit says
Vanita – When you already have a CPA, it’s best to work with your CPA on this. So far your questions don’t have much to do with the subject of this specific blog post. For solo 401k in general, see Solo 401k When You Have Self-Employment Income. In an S-Corp or an LLC elected to be taxed as an S-Corp, the contributions strictly go by the salary. You must take enough salary to make the employee contribution of $18,000 each plus another $6,000 if you are 50. The maximum employer profit sharing contribution is 25% of salary. No salary, no contribution.
sita says
What is the account number section on 1099-r on tax1099.com site?
Harry Sit says
They put a random number there because the IRS requires one. You replace it with your actual account number from wherever you hold the assets.
Dylan says
Hi Harry,
I just spoke with Ascensus, and I was told that they don’t allow after-tax contributions. Has their policy changed since you wrote this article, or are you still using them for your mega backdoor roth contributions? Thanks!
Harry Sit says
I guess it depends on which department of Ascensus you spoke to. The Prototype Document Service at 866-604-7402 only prepares documents. They have different kits. If one kit doesn’t allow after-tax contributions another kit will. If you tell them what you need they will tell you which kit to use.
Dylan says
Harry,
You were correct – the Document Service department was much amenable to after-tax contributions and in-service distributions. They had me use the regular 401k kit and write in the notes section the changes that I wanted. Funnily enough, the plan design assumption section specifically states that after-tax contributions (they call them non-deductible, but I’m assuming that’s the same thing) aren’t allowed and that this can’t be modified for solo 401k accounts. I submitted it, we shall see if they follow through.
Question – do the Ascensus documents form the trust as any kind of corporate entity? Or do they just give it the name you request, and then you request an EIN from the IRS for the plan?
Also, do you send Fidelity a check from a separate bank account for your plan, or from your business account? We just use our personal bank account for our sole proprietorship because, for various reasons, our recordkeeping hasn’t been onerous enough for us to go through the trouble of opening a separate business account (it’s a side business). Although I’m comfortable with this as it stands, I’m not as comfortable with this account also being where contribution checks are issued from. However, it seems silly to set up a separate bank account simply for the purpose of having funds reside there for a day before being sent to Fidelity.
David Ann Arbor says
In your first sentence you said, “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. ”
How did you do this part? Did you contact Fidelity to state you would no longer use them as the solo 401k plan beyond 2014?
But then you opened up an Investment Only Retirement Account with Fidelity for the 2015 year and put 2015 contribution there.
So did the assets in the original Fidelity solo 401k plan just stay put?
Harry Sit says
Assets were transferred into the new accounts by a letter of instructions, something like “The plan was amended. Please transfer all assets in kind from this account to this new account.”
David Ann Arbor says
Does the 1099-R have to be provided by February 1st prior to the tax filing deadline, or can it be done sometime in March?
Harry Sit says
By Jan. 31 to the recipient, Feb. 28 to the IRS if filing on paper, Mar. 31 to the IRS if filing electronically.
https://www.irs.gov/instructions/i1099gi/ar01.html
Lois says
I have a full time job that allows after tax 401k contributions, and have already hit my 18k Roth individual contribution, and plan to hit the 53k limit there for the mega back-door Roth.
I also plan to have a side business completely separate from my company. I know I cannot make any more individual Roth contributions, but would my solo 401k allow me to save another 53k after tax? Could I actually do 2 mega back door Roths?
David Ann Arbor says
No sorry you can’t. Maximum contributions are per individual not her job.
Harry Sit says
It would if your side business generates enough income and your solo 401k plan allows non-Roth after-tax contributions and in-service distributions. You have a separate $54k limit at each unrelated employer.
David Ann Arbor says
Ok I guess I’m wrong. “This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.”
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Frankly I’m surprised about this.
Lois says
Oops==I meant 54k limit for 2017.
Reed says
Thanks so much for this article. Do you know if you can do a mega backdoor roth ira with a defined benefit/401k combo plan? I currently have a solo 401k with fidelity, but with 300k 1099 income I am unable to take advantage of the non-roth after tax contributions (even if fidelity’s 401k allowed it). However, I’m looking to setup a defined benefit/401k combo plan with other TPA. DB plan limits the 401k employer profit sharing contributions to 6% of pay.
So if non-roth after tax contributions are allowed with the 54k 2017 limit, 300k s corp w2 income results in: 18k pretax/aftertax employee contributions, 18k pretax employer profit sharing contributions, and 18k non-roth aftertax employee contributions.
Harry Sit says
It’s a perfect question for your TPA. You are already paying them. Have them earn it.
Stephen says
I have a DB with Schwab, and they say you cannot fund the employer portion of the 401K at all. Can only be the employee portion. Which is actually fine as the DB contributions more than make up for the loss of the deduction from employer contributions. Actually this combination seems to be in the absolute sweet spot:
DB Plan enabling the biggest deductions allowed
401K employee up to 18K
leaving the remainder back door into a Roth IRA
In fact I would argue that with a DB plan it might make sense to fund the entire 401K all the way to the max allowed with after tax and let it go straight to Roth as you should be able to get all the deductions you need from the DB. This also seems to be a way around the issue of having too much money tied up in retirement accounts, which if you want to retire early can be an issue.
Is it possible to fund the 401K entirely with after tax contributions?
Harry Sit says
Stephen – It is possible to fund the 401K entirely with after tax contributions.
Reed says
Harry,
I found a TPA who does a cash balance + 401k combo which has the ability to the mega backdoor roth.
Of the 2 options to either send the aftertax non roth contributions out to a roth ira or convert in the plan to the roth 401k, the TPA recommends converting within the plan. Contributions would be immediately converted to avoid any earnings.
Once the plan is closed or I change jobs I can roll the roth 401k into a roth ira.
Can the entire amount that rolled over from the roth 401k into the roth ira later be distributed tax free and penalty free before 59 1/2 as long as the roth ira has been open for 5 years? Or would the amount that was tax/penalty free just be the original aftertax contributions?
Thank you.
Harry Sit says
No. Post-conversion (in-plan rollover) earnings must wait until 59-1/2.
viral says
Harry:
Do you file any forms with irs to report nondeductible after tax 401k contributions?
OR you have to track tgem as plan admin and report form 8606 only when rolled over to roth?
Thank you!
Harry Sit says
For the year the contribution is made, as a participant, nothing; as a plan admin, include the contribution in 5500-EZ if the plan is required to file one. For the year the distribution occurs (rollover to Roth), as a participant, Forms 8606 and 1040 to report the taxable earnings; as a plan trustee, Form 1099-R to report the distribution, and include the distribution in 5500-EZ if the plan is required to file one.
Reed says
Harry,
Please correct me if I’m wrong. I review the IRS link below.
If I make aftertax nonroth contributions to my 401k then I immediately convert it within the plan to the roth 401k so there are no earnings. Later, I change jobs and roll the roth 401k into a roth ira. The rollover amount from roth 401k into the roth ira which consisted of original aftertax contribution plus earnings should be able to be withdrawn tax free and penalty free before 59.5.
IRS says ” If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).”
And ordering rules for distributions are:
1. Regular contributions.
2. Conversion and rollover contributions, on a first-in, first-out basis (1. Taxable portion then 2. Nontaxable portion)
3. Earnings on contributions.
So if I have no rollovers into my roth ira within the last 5 years which was taxable (required to be included in gross income) then taking a distribution of the entire roth ira before 59.5 would be tax free and penalty free.
https://www.irs.gov/publications/p590b/ch02.html#en_US_2016_publink1000231071
Reed says
Correction to my post above:
So if I have no rollovers into my roth ira within the last 5 years which was taxable (required to be included in gross income) then taking a distribution of all the contributions and rollovers (taxable or nontaxable) before 59.5 would be tax free and penalty free.
Harry Sit says
When you withdraw money that came as a rollover from a Roth 401k, the “clock” traces back to the Roth 401k. Regular Roth 401k contributions count as contributions. Earnings on those contributions count as earnings. In-plan rollovers are treated similarly to Roth conversions. Post-rollover earnings are still earnings. Pre-rollover earnings (none in your case) can age out after 5 years.
Stephen says
Another angle for this is when the self employed person has their own defined benefit pension plan as well. Having this means they cannot contribute the employer part to the 401K, so it is capped at 18K for the employee. However this method opens up the remainder to go straight to a Roth. As as you say Roth is better than taxable! Perfect. Thanks!
Larry J says
Harry,
I have a question regarding the 1099-R deadline. 1/31/19 to recipient, 2/28/19 paper to IRS, and 3/31/19 electronically to IRS…
My wife is paid as a “limited partner” from a medical office on a K1, Form 1065. Her line 4 “guaranteed payments” and line 14 “self-employment earnings” are the same.
We’ve been told she is basically an independent contractor (i.e. self-employed) since we have to pay the self-employment taxes. We both agree this a less than ideal arrangement…
My question is this:
The deadline for her to receive the K1 is 3/15/19.
If we don’t know her self-employment earnings until we receive her K1 in March, how are we to comply with the 1099-R deadlines for the sake of Mega Backdoor Roth and having a solo 401k? Her self-employment income is in a perfect range (based on the spreadsheet) to maximize employee contributions, profit sharing at 25%, and after tax–>to be converted to Roth IRA.
Thanks in advance!
Harry Sit says
The 1099-R is for the distribution from the plan, not for the contribution to the plan. By 3/15 she receives the K-1 for the previous year. She calculates how much she’s allowed to contribute based on the income. She makes the contribution for the previous plan year. If she takes the distribution afterwards, it’s in the current year already. The 1099-R for the distribution is due on 1/31 in the following year.
Larry J says
Thank you for your help! That makes sense. Now I’m just trying to figure out if she is even eligible for solo 401k based on her status as a limited partner receiving a K1….
Harry Sit says
If she’s just an investor the income shouldn’t be self-employment income. If she’s actively working for the partnership, I think the partnership needs to establish the plan as the employer.
Thrifty Femme says
FYI, there are no formulas in the calculated fields in the spreadsheet you have linked.
sophiainvests says
Hi Harry: About filing the 1099-R in the January of the year after the mega back door roth conversion from a self-directed solo 401 k: Am wondering why you use tax1099.com to file this form. Is providing the form directly to the IRS an option? Would that be really difficult or mistake-prone or costly — or would it instead be just as simple as filling in the brief form and mailing it directly to the IRS instead (or perhaps e-filing with them)? What’s the advantage of using a third party like tax1099.com? Any concerns about privacy/ information safety in providing such info to an online third party? Thank you for your seminal articles on the self-directed solo 401k mega back door roth!
Harry Sit says
If you do it on paper you will have to get the form printed with special red ink. Office supply stores sell 1099-MISC. I don’t know if they have 1099-R. If you get business tax software such as TurboTax Business or H&R Block Premium & Business you can e-file. It’s an option if you need the software anyway for S-Corp returns, but it’s not very cost effective if you just need to file the 1099-R.
Sophiainvests says
Thanks, Harry! Very good to know that we shouldn’t just print out the form! I found that you can order the red 1099-R forms from office supply stores (but quantity per package is such that it will cost more than to e-file with tax1099.com if you just have one or two – that is, cheapest pack may be USD7+) – and not sure if I could find in store or need to order. Looks like you can also order from the IRS online to mail to you – not sure if that is free or not as I didn’t complete the order yet, but seems like a good option if the shutdown would not delay things. Yet, the IRS directions also note that if you mail the 1099-R you also have to fill in a 1096. And in their instructions they do urge “if you have a small number of forms” to consider contacting an “IRS business partner who may be able to file at little or no cost to you.” I think there is a problem with the hand filled in 1099-Rs being readable. So all this tends to tip in favor of using an online provider. I have been trying, however, to confirm that tax1099.com is an IRS business partner (or that track1099.com – another one recommended to me – is), but could not find them listed on the IRS website, though each of their websites indicates they are IRS approved. (The IRS website doesn’t list too many of what they call “e-file for business partners” in association with their foregoing recommendation and one of the 1099 focused partners they list seems to have an insecure website, at least on the landing page.) Do you have any idea about how to confirm tax1099.com or track1099.com’s status as IRS approved (if you think that even matters?) or otherwise increase one’s comfort level in using them for the nervous at heart? I see tax1099.com is affiliated with a company named Zenwork – both in Arkansas.
Harry Sit says
From Track1099:
“The IRS previously had a link to an approved vendors list and a PDF, Publication 1582, but in mid-2013 the IRS ceased to support both.
You may confirm any 1099 vendor with the IRS at 866-455-7438, option 3 or email, [email protected].”
Tax1099 is listed in the last Publication 1582 under their previous name Tech Atlantis.
Sophiainvests says
PS. I was able to order the forms for free from the IRS, but, as above, it may be smarter/ safer to file with third party. The 1096, which is also required if you mail in your 1099-R, is also in special red ink – so one would need to order this as well if taking the self-file approach. From online search, it sounds like tax1099.com might be linked with some more well known tax software to do their 1099 job, which is encouraging, but when I wrote tax1099.com directly to ask about how to confirm their IRS approval, the responder (who did respond quickly) didn’t really understand my question and had very weak English. I guess one shouldn’t be too demanding for $2.30 per 1099-R, though.
BTW, in filling in the 1099-R, should the issuer name be “xxx 401k Trust” (the name of the Trust over the solo 401 k plan) or just the plan name (“xxx 401k”)? I’m thinking it should be the Trust name, as that is what has the special EIN and thus probably what is considered to issue the 1099-R. (In my case, the trust takes the plan name but also has the extra word “Trust” added at the end – maybe this is not true for everyone.)
Sophiainvests says
Thanks, Harry, for the info on verifying tax1099.com and verifying such providers generally!!
Sophiainvests says
I went ahead and called the IRS. They could not verify the approval of the e-filing partners and suggested I go to their website (but I haven’t had luck with that and they confirmed it does not include all parties “approved to transmit”).
The man that helped me, however, was knowledgeable about filing direct (by paper and by mail). He said it wasn’t too challenging/ not a big deal and kind of encouraged me to go for it, but reminded me that I need to include a 1096 along with the 1099-R and confirmed the versions sent to the IRS need to be the ones with the special red ink. The forms that you can order for free from the IRS website normally come in 7 to 10 days but because of the shut-down, can’t be sure when they’ll come – not sure if those folks are working (so, yes, consider office supply stores). The paper-filed form would be due to IRS by end of Feb. (Employee version end of Jan., but that can be printed from website.) The caution he told me about filling in by hand is worth noting: write in block letters with black ink and don’t let your letters cross any of the red lines or shaded areas as these forms are read by optical scanners.
Chewy says
Harry,
With regards to issuance of 1099-R, is it a requirement if the after-tax contributions are rolled in-plan to Roth 401k (instead of external Roth IRA)?
Thanks
Harry Sit says
It is.
Shanta says
Harry,
Here is where Im lost.
The process is 2 step
1) Convert from After Tax to Roth 401K (In-plan) – 1099-R issued with small gains as taxable portion
2) Rollover from Roth 401K to Roth IRA – 1099-R issued with zero taxable portion
How is that you are issuing only one single 1099 and a direct rollover from After Tax to Roth IRA?
I confirmed with my plan administrator that the it is indeed a 2 step process.
Can you check?
Harry Sit says
Shanta – In a 401k with non-Roth after-tax contributions, you can do it in two ways: (1) In-Plan Roth Rollover or (2) distribution of the non-Roth after-tax account to Roth IRA. See Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?
If you intend to have the money land in your Roth IRA, you would just do (2) directly, not your convoluted two-step process back to back. Some people would like to keep the money within the plan or maybe their plan only allows (1) but not (2). So they just do (1). When they are finally done with plan many years later, they will do a rollover of the Roth 401(k) account to a Roth IRA. In that case they will have one 1099-R in the year of the In-Plan Roth Rollover, and another 1099-R many years later for the Roth 401(k) rollover to the Roth IRA.
Shanta Tripuraneni says
Harry
Thanks for the update. Makes sense now.
Shalom says
Hi Harry.
This probably is the best article I’ve found online. Period!
I sincerely mean it. It’s very helpful, very impressive. I admire your abilities to ‘go all the way’, wearing all hats of these different roles – not only to maximize your profits, but even more so to be on your own driver seat for your retirement options.
I have one question, perhaps the most basic one:
Who and how created the plan?
In your other post you wrote:
“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.”
But you also wrote that Fidelity, VanGuard etc.. – don’t have the non-Roth after-tax contributions in their offerings.
So who actually makes and sells these plans?
I’ll very much appreciate your reply and it will help me go down your own road.
Thank you in advance,
Shalom.
Harry Sit says
I listed three providers at the end of the other post you read (linked in the first paragraph of this post). I also mentioned which one I used, although I don’t recommend it to people with less experience in administering a 401(k) plan. The other two will work.