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Mega backdoor Roth question

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  • Avatar Dollingerj 
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    Status: Other Professional
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    Joined: 05/03/2019

    After reading WCI MBDR blog and 3 other articles I think I can set up my solo 401k to meet guidelines to have a mega backdoor roth(will use mysolo401k). Question I have is how do I know how much I can fund it. Usually at my employer and my contribution is around $30000. How do I know how much I can make at my 1099? Roughly I make around $30000 annually at my 401k? Anyone have some insight? Thanks

    #214477 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018
    Usually at my employer and my contribution is around $30000

    Click to expand…

    first, provide more detail, what type of plan is this – 401k, 403b, other? – and what type of contribution(s) – salary deferral, match, profit sharing, after tax? – I doubt that $30k into that plan is your contribution

    How do I know how much I can make at my 1099?

    Click to expand…

    I will ignore the “can” part – short answer is you should keep records. And then verify the 1099s you receive match your records

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214478 Reply
    Liked by spiritrider
    Avatar Dollingerj 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 05/03/2019

    Employer plan is a 401k. I max this put here and they put in 5%

    Second part I guess I’m wondering what is the max that can be put into a MBDR. 20% of profit? Same as pretax i401K?

    #214481 Reply
    Avatar jacoavlu 
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    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

    employee after tax contributions are limited to the lessor of 100% of compensation or the annual addition limit (56k in 2019)

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214484 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016

    To provide a little more detail to @jacoavlu‘s post. For a self-employed individual, the maximum employee after-tax contribution to a one-participant 401k is the lessor of:

    • The annual addition limit (2019 = $56K) – 403b annual additions – op401k employee elective contributions – op401k employer contributions.
    • Their self-employed earned income (business profit – 1/2 SE tax) – op401k employee elective contributions – (op401k employer contributions * 2).
    #214485 Reply
    Avatar Dollingerj 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 05/03/2019

    Thanks that helps. My scenario… In my w2 401k i put in 19,000 my employer last year put in 11,000… thus 26000 below the 56k max

    My 1099 i made 30,000 x 98.66%(1/2se tax)= $29598… so the max I could put in in scenario above would be the $26,000. Am I correct in this thinking? Thanks you

    #214487 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018
    My scenario… In my w2 401k i put in 19,000 my employer last year put in 11,000… thus 26000 below the 56k max

    Click to expand…

    the 19k employee contribution is the only part that matters for purposes of discussion of your solo 401k

     

    My 1099 i made 30,000 x 98.66%(1/2se tax)= $29598… so the max I could put in in scenario above would be the $26,000. Am I correct in this thinking?

    Click to expand…

    yes, if business profit (after deduction of applicable business expenses) is 30k, AND you’ve already exceeded the maximum social security wage base in your W2 job, AND you make no pretax employER contributions to the plan, then yes that would be the allowable number for after tax contribution to solo 401k

    you can enter your figures into The Finance Buff’s spreadsheet linked in my signature and see the results

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214496 Reply
    Liked by Dollingerj
    Avatar Dollingerj 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 05/03/2019

    Jacoavlu
    To expand on your last message…. last say I do make my pretax employER contributions(30,000x 19.732%= $5919.60). I’m assuming that $5919 would then be deducted from my MBDR amount I could contribute.

    i401k pretax=$5919
    MBDR i401k=$20081

    Am I on the right track?

    #214500 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

    try again – use the spreadsheet linked in my signature, and see the formula provided in @spiritrider‘s second bullet point above

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214503 Reply
    Liked by spiritrider
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016

    Thanks that helps. My scenario… In my w2 401k i put in 19,000 my employer last year put in 11,000… thus 26000 below the 56k max

    My 1099 i made 30,000 x 98.66%(1/2se tax)= $29598… so the max I could put in in scenario above would be the $26,000. Am I correct in this thinking? Thanks you

    Click to expand…

    You have a separate annual addition limit for each unaffiliated employer. If you have no ownership interest in your W-2 employer, you have a separate $56K limit for your one-participant 401k.

    #214505 Reply
    Avatar Dollingerj 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 05/03/2019

    I do locums at a surgery center with no affiliation to my w2 employer. I am on my phone and cant see signatures or other links on it but I’ll look at home. My employer pretax contribution on $30000 is 5919.. then with what I am understanding from you is 56000-5919= 50081. max I can contribute to MBDR.(since I only made 30,000 I wouldnt be able to go over 30,000)

    I’m sorry I’m new to this and am really trying to educate myself the best way I can. Thanks for your help.

    #214509 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

    Their self-employed earned income (business profit – 1/2 SE tax) – (op401k employer contributions TIMES TWO).

    Click to expand…

    if you are making employER contributions to the plan and have already exhausted your elective contribution in another plan and self employment income is less than the annual addition limit, the above is the pertinent math to determine the allowable after tax contribution and I’ve bolded and reformatted the factor which trips up a lot of people

     

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214510 Reply
    Liked by spiritrider
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016

    You failed to follow the suggestions by @jacoavlu, you can either use the spreadsheet he linked to or my formulas. With $30,000 in business profits and W-2 salary > the SS maximum wage base (2019 = $132,900). Your 1/2 SE tax = $402, self-employed earned income = $29,598 and maximum employer contribution = $5,920.

    You maximum employee after-tax contribution is the lessor of :

    • $56K – $5,920 = $50,080
    • $29,598 – ($5,920 * 2 =  $11,840) = $17,758‬

    Your maximum employee after-tax contribution with a maximum employer contribution of $5,920 = $17,758‬.

    You maximum employee after-tax contribution with no employer contribution = $29,598.

     

    #214518 Reply
    Avatar Dollingerj 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 05/03/2019

    Wow thank you for that very insightful and detailed response. I had not understood the employer contibutions x 2 even though not looking back and having a better understanding it was very clear on your end. It sure appears that paying some of the employer pretax contribution will limit MBDR contribution. I am guessing there would be arguments on both sides of this isle. One to kick the taxes down the road and the other to put money in after taxes and let that money grow tax free. If I file married and separate(I’m in 32% tax bracket after write offs) and if my wife and I file married jointly(in 37% tax bracket) would you have an opinion? Id guess if in 32% you will say pay int MBDR only and if 37% pay the pre tax portion and the MBDR portion? Thank you very much. Great input

    #214554 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1709
    Joined: 02/01/2016

    If your taxable income makes you eligible for the QBI deduction, it may make more sense to make all employee after-tax contributions, because the employer contributions reduce your qualified business income.

    WCI had a an article about these issues yesterday. A New Reason to Use the Mega Backdoor Roth IRA

    #214581 Reply

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