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Research into solo 401k with intent for mega backdoor roth

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  • Research into solo 401k with intent for mega backdoor roth

    I am making this thread to organize my research and thoughts, and get opinions on if I am approaching this correctly.

    I am a W2 employed private practice physician, this year I will receive a decent amount of 1099 income from hospital call responsibilities (about $30,000)

    I value pretax accounts as a priority, so through my W2 I elect 19,000 employee deferral (pre tax)

    My W2 job does not have match or profit sharing contributions (I really wish it did)

    I plan to open up a solo 401k to allow pre tax employer contribution (roughly calculated as 20% of ( business profit - 1/2 se tax))

    In addition to maximize the amount of tax advantaged money I can put away I plan to hire a third party administrator to draft up IRS approved documents to set up a non prototype solo 401k.  Through research it seems that these are 2 popular options https://discountsolo401k.com/

    https://www.mysolo401k.net/

    From my research it appears that Fidelity has easiest non prototype plans that have been used successfully

    https://www.fidelity.com/customer-service/forms-applications/nonprototype-retirement-complete

    Specifically these plans will allow voluntary non roth post tax contributions and in service withdrawls

    This is the magic of having the third party administrator draft the plans as most 401ks do not offer this.  For some reason I can't wrap my head around, you can contribute post tax money to the plan and then convert it to either a roth ira or roth 401k.

    To calculate how much you can contribute use the finance buff calculator

    https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934 898a

     

    In my example for 2019 would look like the following

    W2- 19,000 pre tax trad 401k

    1099- 5,919.66 pre tax profit sharing solo 401k

    17,758.97 post tax non roth that will be transfered into roth

    In essence I get access to a significant amount more roth money for a small fee

    Here are my proposed steps

    Step 1) Go to discountsolo401k and sign documents to form the 401k trust

    Step 2)  Get EIN for the trust

    Step 3) Fill out fidelity paperwork for non prototype retirement account, I assume there will be a pretax, roth, and after tax non roth account

    Step 4)  Use TFB calculator to determine contributions (I plan to do pretax PSP and after tax non roth contribution)

    5) Rollover the non tax contribution to Roth IRA (edit: or use in service in plan Roth rollover to roth 401k)

    6)Fill out 1099-R

     

    Excellent resources

    https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

    https://thefinancebuff.com/rollover-after-tax-to-roth.html

    https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html

    https://forum.mrmoneymustache.com/taxes/anyone-execute-a-mega-backdoor-roth-in-solo-401k/

    https://thecollegeinvestor.com/17561/understanding-the-mega-backdoor-roth-ira/

    Spiritrider here and on bogleheads forum

     

  • #2
    This looks like a great thread. I may give this a try myself, though my SE income is a tiny fraction of yours.

    TFB has a great calculator but I'm not so sure he has the Medicare tax correct for high earners. It appears to ignore the 0.9% increase that applies to income > $200,000.

    Hope spiritrider weighs in.

    Comment


    • #3
      Very impressive @saildawg. This is a well researched, serious and comprehensive plan and post. I and tfb have been concerned that too many people have read his excellent posts on custom one-participant 401k plans for Mega Backdoor Roth . Then lacked the discipline and attention to detail necessary to administer such plans. From reading this post, I am confident that you do.

      Comment


      • #4
        @Lithium, you are correct that tfb's spreadsheet does not calculate the additional 0.9% Medicare surtax. However, the spreadsheet is for calculating one-participant 401k contribution limits. It is not a substitute for tax preparation and/or tax software.

        The 0.9% Medicare surtax is just that. It is not part of the SE tax calculation. It is an additional tax calculated on your individual tax return. It is not used in the self-employed earned income (business profit - 1/2 SE tax) calculation. It does not affect the one-participant 401k contribution limit calculations.

        Comment


        • #5
          This is almost precisely what I’ve done. I’m a private practice owner and max a 401k plan already all pretax through deferral and profit sharing.

          For unrelated 1099 income I setup a solo 401k with Mysolo401k Financial. What I do and a choice that you have is to avoid entirely the pretax employer contribution to the solo 401k and rather make only after tax contributions. By doing this you of course you lose the deduction but you increase the overall dollars going into the plan. No right or wrong, depends on your marginal tax rate and preference.

          I would note that Mysolo401k and Discountsolo401k are not really TPAs. They of course provide the plan documents (those from Mysolo401k come with an IRS opinion letter blessing the plan; discountsolo401k may as well, you could ask) and assist in all aspects of setting up the plan, establishing the trust, completing account applications, etc and will assist in maintenance such as verifying your contribution calculations (if you ask) and preparing the 1099-R for the rollover, but YOU are the plan administrator. They’re not functioning in the usual capacity of a TPA. If they did they’d charge a lot more. You could still easily screw things up if you tried, and they wouldn’t stop you from doing so.

          Mysolo401k has a calculator on their site to help in figuring contribution amounts but it is not correct. You are right to use The Finance Buff’s.

          Re step 5, you don’t have to rollover to Roth IRA. You can simply do an in plan Roth rollover (IRR) and the funds stay in the 401k, moving from after tax to Roth subaccounts. Again no right or wrong, I prefer the simplicity of the IRR. Different states have different asset protection laws regarding IRAs vs 401ks if that matters to you.

          Comment


          • #6
            I’m very curious about this. I guess I’d never really seriously considered it before. I max out 401K for my main W2 job, HSA, Backdoor Roth, and individual 401K for my 1099 income (about $21k last year). I think I’m doing well with that, but I recently opened a brokerage account to start investing more in a taxable account. It sounds like I could do the Mega to get a bunch more in Roth? I guess I have to figure out how much more it would allow to see if it is worth the hassle/complexity. Has there been any step doctrine concern for this or is it now considered comparable to the regular Backdoor Roth?

            Comment


            • #7
              After tax 401k and in plan Roth rollover seems to be a more common plan feature these days in megacorp plans, based on the frequency it comes up on bogleheads. It’s perfectly legal. Not seen commonly in solo 401ks for a number of reasons I’m sure but at least two of which are because it requires a custom or semi custom plan document, and CPAs and advisors with decent knowledge of the benefits of solo 401ks let alone after tax contributions and Roth rollover seem to be few and far between.

              Comment


              • #8


                CPAs and advisors with decent knowledge of the benefits of solo 401ks let alone after tax contributions and Roth rollover seem to be few and far between.
                Click to expand...


                Understatement of the day I am sure!  Interesting info guys, if I had much 1099 income would definitely think about doing this.

                Comment


                • #9
                  My 1099 income is only about $5k. From the MMM thread, discount solo 401k is about $575 the first year and $100 each subsequent year you do the mega backdoor roth. At the moment I am thinking it would be cost effective, since even though $3000 is a paltry sum that would otherwise go in a taxable account, the capital gains tax I would pay several decades from now would exceed it. And currently, my future plans are to transition to part time locums work when this would be more a more useful strategy, but that would still justify the upfront $575 cost. I'll wait till the end of the year before I decide how to play this. I've never even opened a solo 401k before, so this would be an interesting adventure.

                  Comment


                  • #10
                    The setup and maintenance fees for such a plan are deductible on schedule C

                    Comment


                    • #11





                      CPAs and advisors with decent knowledge of the benefits of solo 401ks let alone after tax contributions and Roth rollover seem to be few and far between. 
                      Click to expand…


                      Understatement of the day I am sure!  Interesting info guys, if I had much 1099 income would definitely think about doing this.
                      Click to expand...


                      The advice of many (most?) such professionals is actually counter productive in that they tend to advise SEP IRAs and hence screw up regular backdoor Roth IRAs

                       

                      Comment


                      • #12




                        Has there been any step doctrine concern for this or is it now considered comparable to the regular Backdoor Roth?
                        Click to expand...


                        Except for a certain "chicken little" well-known CFP blogger, there was never any legitimate basis for applying the step transaction doctrine to the Backdoor Roth. Especially, considering his mitigation strategy of waiting one year would have zero ability to correct the defect, if it really was a step transaction.

                        With the Mega Backdoor Roth, there is absolutely NO concern. IRS notice 2014-54 constitutes "substantial authority" that explicitly endorses the rollover of employee after-tax contributions to a Roth IRA.

                        Comment


                        • #13




                          Very impressive @saildawg. This is a well researched, serious and comprehensive plan and post. I and tfb have been concerned that too many people have read his excellent posts on custom one-participant 401k plans for Mega Backdoor Roth . Then lacked the discipline and attention to detail necessary to administer such plans. From reading this post, I am confident that you do.
                          Click to expand...


                          Thanks spiritrider!  That really means a lot to me,and gives me confidence to proceed.

                           

                           

                          Comment


                          • #14


                            Re step 5, you don’t have to rollover to Roth IRA. You can simply do an in plan Roth rollover (IRR) and the funds stay in the 401k, moving from after tax to Roth subaccounts. Again no right or wrong, I prefer the simplicity of the IRR. Different states have different asset protection laws regarding IRAs vs 401ks if that matters to you.
                            Click to expand...


                            Excellent point, I was interested in converting to Roth IRA as I am interested in early retirement and like the idea of access to the money earlier.  It seems that Roth ira may not be as protected in Georgia where I am so I might want to consider doing IRR to roth 401k

                            https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

                            I am not sure if I am correct in the asset protection though.  I'll have to do more research.

                            Comment


                            • #15




                              My 1099 income is only about $5k. From the MMM thread, discount solo 401k is about $575 the first year and $100 each subsequent year you do the mega backdoor roth. At the moment I am thinking it would be cost effective, since even though $3000 is a paltry sum that would otherwise go in a taxable account, the capital gains tax I would pay several decades from now would exceed it. And currently, my future plans are to transition to part time locums work when this would be more a more useful strategy, but that would still justify the upfront $575 cost. I’ll wait till the end of the year before I decide how to play this. I’ve never even opened a solo 401k before, so this would be an interesting adventure.
                              Click to expand...


                              you can use TFB calculator to see the value

                              https://docs.zoho.com/sheet/published.do?rid=b6wwv1d611964d92c49f491b3b7f9cc57 8207

                              https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

                               

                              As mentioned the cost is deductible for business expense.

                              Comment

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