Menu

Research into solo 401k with intent for mega backdoor roth

Home Retirement Accounts Research into solo 401k with intent for mega backdoor roth

  • Avatar borg 
    Participant
    Status: Physician
    Posts: 30
    Joined: 03/21/2019

    Curious how much this is worth it for small 401k accounts to set up—is it worth the trouble?  My solo 401k for moonlighting is only 3.5% of my overall portfolio

    #235436 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
    Posts: 135
    Joined: 09/05/2018

    Perhaps you fully grasped this already, but in case not, this strategy allows you to load up an i401k to the maximum limit (currently $56,000) with only slightly more income than that. This is because the after tax non Roth contributions are separate to the employee contribution limit and not subject to a % of income. You can calculate exactly how much you could put away from your moonlighting income using this: “The Finance Buff’s solo 401k contribution spreadsheet: https://goo.gl/6cZKVA“. So, if your moonlighting income would allow you to invest a significant amount (calculated using that linked spreadsheet) and you have extra cash flow you are investing in taxable account that could instead be made into Roth, then yes it is worth it.

    #235447 Reply
    Avatar CFEonline 
    Participant
    Status: Physician
    Posts: 135
    Joined: 09/05/2018
    Fund the accounts with bill pay

    Click to expand…

     

    Saildawg did you test the EFT method spiritrider mentioned?

     

    A form member on BH reported that they were successfully able to do an EFT directly to the routing number and account numbers of their Fidelity Non-Prototype Accounts. I have no independent way to verify that, but it is worth a try.

    Click to expand…

     

    #235449 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 330
    Joined: 01/24/2016
    Fund the accounts with bill pay 

    Click to expand…

     

    Saildawg did you test the EFT method spiritrider mentioned?

     

    A form member on BH reported that they were successfully able to do an EFT directly to the routing number and account numbers of their Fidelity Non-Prototype Accounts. I have no independent way to verify that, but it is worth a try. 

    Click to expand…

     

    Click to expand…

    No I did not, I have been happy using bill pay feature.  Usually takes 3-5 business days and is already set up and just takes 1-2 button clicks so I don’t see any compelling reasons to do it as of now.

    #235467 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 330
    Joined: 01/24/2016

    Curious how much this is worth it for small 401k accounts to set up—is it worth the trouble?  My solo 401k for moonlighting is only 3.5% of my overall portfolio

    Click to expand…

    Finance buff gives you a calculator do compare taxable vs roth

    https://docs.zoho.com/sheet/published.do?rid=b6wwv1d611964d92c49f491b3b7f9cc578207

     

    Only you can decide for yourself.  Play with calculator, but it is very impressive to see difference of roth vs taxable over long term.  It also depends on how long you plan to continue with side 1099 income.  I know for as long as I am at my W2 job (which may eventually be partner), i will have a good source of 1099 income (call pay).  The first year cost are more significant to set up the non prototype 401k, but the years after are minimal.  I think anything above 20k in 1099 is worth considering and running the numbers.

    #235468 Reply
    Avatar Avefenix 
    Participant
    Status: Physician
    Posts: 4
    Joined: 03/10/2018

    I have a self employed 401k with Fidelity registered with an EIN with profit sharing for myself and spouse. I maximize the plan each year with 56 k for myself and my wife.

    I contribute to my w2 401k 19 k, HSA, Backdoor roth for myself and spouse.

     

    I am a w2 employee but do locums all year long paid in 1099.

     

    My 1099 amount for 2019 will be approximately 230 k

    I also do surveys and utilization reviews which generates 50 k

     

    I am curious how creating a Mega backdoor roth will benefit me.  I was planning to contribute the leftover 1099 income into a taxable account. Any thoughts or suggestions ?

    #235525 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 330
    Joined: 01/24/2016

    I have a self employed 401k with Fidelity registered with an EIN with profit sharing for myself and spouse. I maximize the plan each year with 56 k for myself and my wife.

    I contribute to my w2 401k 19 k, HSA, Backdoor roth for myself and spouse.

     

    I am a w2 employee but do locums all year long paid in 1099.

     

    My 1099 amount for 2019 will be approximately 230 k

    I also do surveys and utilization reviews which generates 50 k

     

    I am curious how creating a Mega backdoor roth will benefit me.  I was planning to contribute the leftover 1099 income into a taxable account. Any thoughts or suggestions ?

    Click to expand…

    I am confused you have a business that already has 401k and your wife is an employee of this business?

    Then you have a W2 job

    Then you have 1099 income from call

    Then you have 1099 income from surveys

    ???

    #235528 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018

    there’s really no benefit to a custom plan allowing mega backdoor Roth, when you have enough self employment income to reach the annual addition limit with only employer contributions

    if you preferred Roth over pretax, you could just use Etrade’s free plan which allows in plan Roth rollover, and not have to bother with after tax contributions.

    the mega backdoor Roth makes more sense for those of us with modest amounts (perhaps $5k up) of self employment income and maxed out deferral in another plan. In this case the 20% employer only contributions are fairly small, but 100% after tax to Roth is nice to have.

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

    #235531 Reply
    Liked by Tim, Peds, saildawg
    Avatar Avefenix 
    Participant
    Status: Physician
    Posts: 4
    Joined: 03/10/2018

    Saildawg

     

    That is correct.  I have a w2 position with a 401k plan that I contribute every year.

     

    I also work locums and get paid as 1099 employee. I created a business with a self employed 401k plan with profit sharing to take advantage of the 1099 income I would be generating. My wife is included in this plan

     

     

     

    #235537 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 330
    Joined: 01/24/2016

    Saildawg

     

    That is correct.  I have a w2 position with a 401k plan that I contribute every year.

     

    I also work locums and get paid as 1099 employee. I created a business with a self employed 401k plan with profit sharing to take advantage of the 1099 income I would be generating. My wife is included in this plan

     

     

     

    Click to expand…

    Sounds like you will max out tax deferred with as much as you are making, and you totally should.  So the mega backdoor roth likely wont be a great avenue for you.  Maybe others can chime in on if you can set up another business for your consulting survey income and if that would qualify as another business to open solo 401k for in order to attempt megabackdoor roth.  This is beyond my headspace though

    #235541 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018

    No it doesn’t make sense to set up another solo 401k for additional 1099 income. Even separate “side” jobs because they would both fall under a controlled group. And be subject to a single contribution limit.

    And be careful “including” your spouse in the plan. Your spouse needs to perform legitimate tasks for the business, and be paid at a legitimate rate. Spouse can’t max out a plan just for opening your mail or something.

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

    #235719 Reply
    Avatar DAK 
    Participant
    Status: Other Professional
    Posts: 22
    Joined: 11/30/2016

    there’s really no benefit to a custom plan allowing mega backdoor Roth, when you have enough self employment income to reach the annual addition limit with only employer contributions

    if you preferred Roth over pretax, you could just use Etrade’s free plan which allows in plan Roth rollover, and not have to bother with after tax contributions.

    Click to expand…

    I’m not sure about that.  Making tax-deferred employer contributions would decrease your QBI and thus your QBI deduction (assuming taxable income qualifies, etc.).  If you turned around and converted that in-plan you’d pay maximum marginal tax on the conversion.

    If instead you make after-tax non-roth contributions, business income would still be maximized, leading to a higher QBI.  Does that sound right or am I missing something?

    #235795 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018
    I’m not sure about that.  Making tax-deferred employer contributions would decrease your QBI and thus your QBI deduction (assuming taxable income qualifies, etc.).  If you turned around and converted that in-plan you’d pay maximum marginal tax on the conversion. If instead you make after-tax non-roth contributions, business income would still be maximized, leading to a higher QBI.  Does that sound right or am I missing something?

    Click to expand…

    I will not at all claim to know what’s best when the QBI deduction is in play. In such a case it really takes a detailed analysis.

    The marginal tax on the conversion is true, but the alternative is also true where you’re paying marginal tax on the taxable income that would have otherwise been deducted if you’d made the pretax employer contributions. So I think that’s a wash.

     

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

    #235797 Reply
    Avatar Sean 
    Participant
    Status: Physician
    Posts: 94
    Joined: 01/15/2016

    vcp/B3e 🙂

    #236107 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7958
    Joined: 01/09/2016
    I’m not sure about that.  Making tax-deferred employer contributions would decrease your QBI and thus your QBI deduction (assuming taxable income qualifies, etc.).  If you turned around and converted that in-plan you’d pay maximum marginal tax on the conversion. If instead you make after-tax non-roth contributions, business income would still be maximized, leading to a higher QBI.  Does that sound right or am I missing something?

    Click to expand…

    I will not at all claim to know what’s best when the QBI deduction is in play. In such a case it really takes a detailed analysis.

    The marginal tax on the conversion is true, but the alternative is also true where you’re paying marginal tax on the taxable income that would have otherwise been deducted if you’d made the pretax employer contributions. So I think that’s a wash.

    Click to expand…

    @dak, it depends. With both W2 and IC income, you could easily be in the sphere of losing all of your QBI deduction because your total taxable income is above the threshold for utilization of 199A.

    For those who are above the threshold, the next step may be to consider a DB plan if you have sufficient IC income to justify. Also, this is one of the few times I could recommend hiring a non-working spouse in order to maximize solo-k contributions, despite the SS tax hit.

    As with most situations this complex, these are very personal calculations and you need to run the numbers with your CPA. It would be nuts to be going through this w/o an experienced CPA simply to save prep costs, btw. jmpo.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #236164 Reply
    Liked by Tim

Reply To: Research into solo 401k with intent for mega backdoor roth

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear