By Dr. Jim Dahle, WCI FounderWarning: We're getting into the weeds today. This is definitely NOT a back to basics post.
As discussed in a previous post, the Section 199A pass-thru business tax deduction has forced us to revamp a large part of our financial lives. This deduction, designed to keep pass-thru business owners (sole proprietorships, partnerships, and S Corps) competitive with C Corps after the Tax Cuts and Jobs Act of 2017 (TCJA), is our new largest deduction (it used to be retirement account contributions and charitable deductions). Rearranging our financial lives in order to maximize it is well worth our time and effort.
Roth vs Tax-Deferred 401(k) Contributions
For a long time, I have generally recommended that doctors in their peak earnings years preferentially use tax-deferred retirement accounts. This allows them to get a tax deduction now, enjoy tax-protected and asset-protected growth, and most importantly, score some extra money from the arbitrage available between their high marginal tax rate now and their usually lower tax rates later. However, I have also been careful to point out that there are exceptions to this rule, one of which is being a super-saver.
Now there is no dictionary definition of super-saver, but the idea behind it is if you are going to be well into the top tax bracket in retirement, you may want to rethink the traditional tax-deferred advice and instead make tax-free (Roth) contributions and maybe even do some Roth conversions, even at the top tax rate.
There are a number of advantages for the very wealthy to having a larger portion of their portfolio in Roth accounts:
- No required minimum distributions forcing you to move money from a tax-protected account to a taxable account
- More of your portfolio is in tax-protected accounts and thus grows faster
- A larger percentage of your heirs' inheritance can be stretched
- More ability to lower your tax bill in retirement
- A good hedge against rising tax rates
- Less likelihood of having an estate tax problem
- Better asset protection since more of the portfolio is in a retirement account instead of a taxable account
Despite those advantages, it's still the right move for most docs to do tax-deferred contributions because of that arbitrage between tax rates. However, over the last few years as The White Coat Investor has seen unexpected financial success, more and more I have found myself looking at our tax-deferred contributions and wondering if we were doing the right thing.
- We are certainly super-savers. Despite the kitchen renovation that has exploded into tearing off multiple walls of our house this Fall (more on that in future posts), generally living on 5-10% of your gross income has an interesting side effect of causing your portfolio to grow very rapidly despite large charitable contributions.
- It seems a virtual certainty at this point that our marginal tax rate in retirement will at least be the equivalent of the 32% tax bracket and quite possibly 37% if our success continues for just a few more years. (Ask me how this feels knowing there was no Roth TSP while I was in the military with a taxable income under $100K.)
- It is now quite possible that we will have an estate tax problem I never expected, especially if the estate tax exemption is lowered at some point in the future. While I fully expect to cure our estate tax problem by simply increasing gifting and charitable contributions, having more money in Roth accounts instead of tax-deferred + taxable accounts does reduce the size of our estate and provide more options.
All of that already had me thinking about changing over to Roth 401(k) contributions for the employee portion of our 401(k)s, but when the TCJA was passed, it was the final nail in the coffin. Not only was it quite likely that we were better off with Roth contributions, but now we weren't even getting a 37% deduction on our solo 401(k) employer contributions since they are subtracted from the Ordinary Business Income on which the 199A deduction is calculated. We were only getting a 37% * 80% = 29.6% deduction. It seems really silly to take a 29.6% deduction now knowing we would be paying at least 32% at withdrawal on that money. So we have decided to stop making those contributions starting in 2019.
The Mega Backdoor Roth IRA
So are we just going to invest in taxable? No way. Tax-protected growth and asset protection is just too valuable. Instead of making “employer contributions” to our solo 401(k), we're going to make employee after-tax contributions. We get no deduction for these contributions, and, if the 401(k) allows it, we can either do an instant Roth conversion of those funds inside the 401(k) or transfer the money to an outside Roth IRA, tax-free. This process (after-tax contributions + instant Roth conversion) is known as a Mega-Backdoor Roth IRA. If you thought a Backdoor Roth IRA was awesome, wait until you get a load of just how much money you contribute to a Roth IRA each year through a Mega Backdoor Roth IRA.
What we were doing before:
- $32K tax-deferred employer (self-match) contribution into my partnership 401(k)/PSP (I no longer make enough clinically to max it out)
- $30K tax-deferred contribution into partnership Cash Balance/Defined Benefit Plan
- $19K tax-deferred employee contribution into my WCI 401(k)
- $37K tax-deferred employer contribution into my WCI 401(k)
- $19K tax-deferred employee contribution into Katie's WCI 401(k)
- $37K tax-deferred employer contribution into Katie's WCI 401(k)
- $7K HSA contribution
- $6K into my Backdoor Roth IRA
- $6K into Katie's Backdoor Roth IRA
- Total tax-deferred contributions: $144K
- Total HSA contributions: $7K
- Total tax-free contributions: $12K
- Total tax-protected contributions: $163K
- Total tax-protected contributions adjusted for taxes (45.2% marginal rate): $98K
What we are doing now:
- $19K tax-deferred employee contribution into my partnership 401(k)/PSP (New plan this year allows employee contributions)
- $32K tax-deferred employer contribution into my partnership 401(k)/PSP
- $17.5K tax-deferred employee contribution into my partnership Cash Balance/Defined Benefit Plan (New plan this year affects my contribution)
- $56K after-tax contribution into my WCI 401(k)/Mega Backdoor Roth IRA
- $19K tax-deferred contribution into Katie's WCI 401(k)
- $37K after-tax contribution into Katie's WCI 401(k)/Mega Backdoor Roth IRA
- $7K HSA contribution
- $6K into my Backdoor Roth IRA
- $6K into Katie's Backdoor Roth IRA
- Total tax-deferred contributions: $87.5K
- Total HSA contributions: $7K
- Total tax-free contributions: $105K
- Total tax-protected contributions: $199.5K
- Total tax-protected contributions adjusted for taxes (45.2% marginal rate): $160K
I'm ignoring the savings we do for our kids (Roth IRAs, UGMAs, 529s) and our taxable account contributions (actually the majority of our savings these days) here. But just looking at the tax-protected accounts, we've gone from sheltering $163K to sheltering $199.5K. If you actually adjust those tax-deferred amounts for our current marginal tax rate of 45.2%, we've gone from $98K to $160K, a 63% increase. But wait, there's more.
Katie's Pay Cut
By going to after-tax contributions for Katie, Katie no longer needs to make as much money as she used to in order to max out the 401(k). So I gave myself a raise and cut her pay dramatically. Yup, our family is voluntarily contributing to the gender pay disparity. But there is a method to our madness. Think about it. The White Coat Investor, LLC files taxes as an S Corp.
How much salary does she need to be paid in order to be able to contribute $56K to a 401(k) as employee tax-deferred and employee after-tax contributions? Well, $56K plus enough to cover her payroll taxes. How much did she need to be paid in order to contribute $56K to a 401(k) as employee tax-deferred and employer tax-deferred contributions? Well, $37K/20% = $185K + enough to cover her payroll taxes. So she can take a 75% pay cut and still max out that account.
“What? I still don't get it? Why do you want to pay her less?”
Because, my young padawan, every dollar she gets paid as salary costs us 15.2% in payroll taxes. If we pay her $185K, we pay 12.4%*132,900 = $16,479.60 in Social Security taxes and 2.9%*185,000 = $5,365 in Medicare taxes. So we want to pay her as little as possible while still being able to max out that account and justify the salary to the IRS. (Since her job description is so flexible and those types of jobs typically don't pay very much, that's pretty easy to do. How many of you are paying full-time employees less than Katie is paid part-time?)
The issue, of course, is that the 199A deduction, at least at our income level, is partially based on the salaries our company pays. So if we pay her less money, our 199A deduction shrinks proportionally. That's no good. So what's the solution? We just pay me more. So she took a big pay cut and I got a big raise. Yay me! Overall, the total salary paid by the company will be similar so the 199A deduction will be similar.
So why did I get the raise instead of her? Are we sexist? Nope. Remember I have that other job down at the hospital. Even if I were only making $56K with WCI, I would still pay the maximum Social Security tax each year. That's not the case for Katie whose only job is with WCI. The bottom line is that we're saving Social Security taxes on the difference between the 2019 Social Security wage base ($132,900) and the salary we pay Katie (about $64,000). ($132,900-$64,00) * 12.4% = $8,544. There is no Medicare tax savings of course, since we're getting the same total salary as a couple and it's all subject to Medicare. And half of that SS tax we would have paid for Katie is deductible, so it's really only $6,613 we're saving but hey, $6,613 more than covers a luxurious six-day heli-skiing vacation. It's real money.
Other Retirement Account Changes
#1 Cash Balance Plan Contributions
The careful reader will notice a few other changes in our retirement account line-up for 2019. My cash balance plan contribution went down. I'm pretty annoyed with it, but we changed plans this year. The new one admittedly has a better design, but its structure has a nasty side effect for young super-savers. Whereas the old plan let everyone contribute up to $30K, in the new plan the contribution limits are determined by age.
- <35 $5K
- 36-40 $7.5K
- 41-45 $17.5K
- 46-50 $40K
- 51-55 $80K
- 56+ $120K
I turn 44 in 2019, so it'll still be a couple of years before this change works out better for me.
#2 Partnership 401(k) Over WCI 401(k)
You will notice I am now using my $19K employee contribution at the partnership 401(k) instead of the WCI 401(k). It made a lot of sense to use it in the WCI 401(k) when I was making more money practicing medicine than running WCI. Now the situation is reversed. I don't actually make enough clinically to max out the partnership 401(k) even if I use the employee contribution there, but I can contribute more overall if I use the employee contribution there instead of our individual 401(k). Our partnership's new 401(k)/PSP actually allows employee contributions now, so I will just do that.
#3 Tax-Deferred Partnership 401(k) Contributions
You will also notice that I am doing tax-deferred contributions to my partnership 401(k). Remember that income is not eligible for the 199A deduction because medicine is a specified service business and our taxable income is well over the $315-415K limit. So that deduction is still worth 37% (federal) to us rather than 29.6% like it would be in the WCI 401(k). Maybe we'll be in the 37% bracket in retirement, maybe we won't, but we'll certainly be in a bracket higher than 29.6%. At least for 2019, we'll continue to do tax-deferred contributions if they are available to us. We're only talking about $19K here anyway, the rest (both the profit-sharing portion and the cash balance contribution) have to be tax-deferred.
You will notice Katie's employee contribution is also tax-deferred. That income is deferred from her salary, and so doesn't count toward Ordinary Business Income for the 199A deduction, so it still provides us a 37% (federal) deduction. We'll continue to use that for 2019 for the same reasoning outlined above.
Additional Complexity Using a Mega Backdoor Roth IRA
It's pretty obvious to see the advantages of these changes for us. We're able to protect a ton more money after-tax, really maximize the value of our retirement accounts, and even lower our payroll taxes (pretty much a free lunch in our case). The big downside, unfortunately, is additional complexity. As if our financial lives weren't complex enough already.
For years we've had the WCI 401(k) at Vanguard. Vanguard's individual 401(k) has its issues. The customer service isn't awesome, they don't allow IRA rollovers, and until recently, they didn't let you buy the lower cost admiral shares funds. But it was good enough for our purposes for a long time. The big problem now, however, was that the Vanguard individual 401(k), at least the off-the-shelf version, doesn't allow after-tax employee contributions or in-service conversions/rollovers, the two features necessary to do a Mega Backdoor Roth IRA. As I looked around at the other off-the-shelf individual 401(k)s, (Fidelity, Schwab, eTrade, TD Ameritrade) I found that none of them really allowed this. I would need to go to a customized plan and I was going to need professional help to do so. And professional help is rarely free and often quite expensive.
A Customized Mega Backdoor Roth IRA Plan with Mysolo401k.net
After shopping around a bit, I settled on mysolo401k.net. The fees were low and their website actually discussed the Mega Backdoor Roth IRA in detail. I thought that was a good sign. Within minutes I had the head of the company, Mark Nolan JD, on the phone answering my questions. It was such a good experience I thought they would make a great new affiliate partner for The White Coat Investor. It's always easier to plug companies that I actually use. At first, they agreed to not only pay me an affiliate fee for new business I brought them, but also discount their fees from $795 up-front plus $125/year to $700 up-front plus $125/year. Win-win-win. Shortly after I did a podcast mentioning them, they backed out of the agreement and decided to just lower their fees to $500 up-front and $125/year. Lame for me, but it's still a win for you and for them. Maybe I can talk them into sponsoring a podcast or something down the road.
Another option for you could be Rocket Dollar ($100 off with code WHITECOATINVESTOR) or My 401K ($50 bonus for going through my link) who I do have affiliate deals with. They administer self-directed Solo 401(k)s and IRAs. Because it's self-directed, you can buy real estate properties on your own or leverage RE crowdfunding platforms like Equity Multiple, RealtyMogul, Fundrise, Roofstock, CrowdStreet, etc.
Choosing a Fund Custodian
There was an incredible amount of paperwork involved. Pages and pages and pages and pages and pages. You see, mysolo401k.net isn't going to function as the custodian of the funds. They had to go to either Schwab or Fidelity. I already had accounts at both (partnership 401(k) at Schwab and HSA/Credit Cards at Fidelity), but decided to go Fidelity because I thought I might just use the 0% ER index funds there. Of course, when there are two companies involved and 4 new accounts (a tax-deferred and an after-tax for both of us and we didn't bother with the Roth accounts since we figured we'd just do rollovers to our Vanguard Roth IRAs) a few minor things were screwed up and had to be redone. But I was impressed with how much better the service was from both companies than what I've come to expect from Vanguard.
Once I got our 401(k) money over to Fidelity, I was disappointed to discover that I couldn't buy the 0% ER Index Funds after all. No biggie, I just paid a $4.95 commission and bought Vanguard ETFs. This isn't my first rodeo, but I was surprised that Fidelity didn't want my business in that respect.
“Checkbook” 401(k)
Another great feature of having a 401(k) plan actually designed by someone who knows what the heck they are doing is that this is a self-directed “checkbook” 401(k). That means I can invest it in anything I want (except Fidelity 0% ER index funds apparently). I suspect I will eventually take advantage of this feature to move some of my very tax-inefficient debt real estate/hard money loan funds out of taxable and into tax-protected.
Take-Home Points
This post is long enough, let's wrap it up. Here are the take-home points:
- If you qualify for the 199A deduction, you might want to consider Roth and Mega Backdoor Roth 401(k) contributions.
- If you want to do a Mega Backdoor Roth IRA in your i401(k), you're going to need a customized plan.
- After-tax 401(k) contributions allow you to max out your 401(k) on much less income.
- Maximizing your use of retirement accounts helps you reach your financial goals faster and protect assets from creditors, but often introduces a lot of complexity to your financial life.
What do you think? Have you done a Mega Backdoor Roth IRA before? Did you make any changes to your retirement plans in response to the new 199A deduction?
My current retirement plan allows me to reach $56,000 total with my contribution plus what is matched. Does that mean I cannot do the mega back door Roth IRA? Thanks for any help understanding.
Not in that 401(k). Got another job/employer/business with another 401(k)?
I’m motivated to find one after reading this article.
My plan administer did say I could make my deferrals “Roth deferrals”—do you think this would be worth doing?
Depends, but usually not in peak earnings years.
I am curious to hear if anyone has had the wrath of the IRS in making such a large contribution? I am a self employed physician, with my group paying my corporation in the form of a K-9 and then my corporation paying me as the sole employee. Our entire group was recently audited and was told we are not allowed to be S Corps for tax purposes, and was required to pay the payroll tax on all the draw that was done for the last three years and pay a penalty. Even though I take a very reasonable W2 salary, being forced to take all my earnings through payroll is going to make a significant dent in what I could invest, to the tune of overa million dollars when I consider lost interest I’ve missed out from compound interest over the course of my career. A lot of the comments and suggestions are founded upon the benefits of having an S Corp. Anyway around this?
What is “wrath”? It’s either legal or it isn’t. Follow the rules and it’s legal and you don’t have to worry about an audit because you will win it.
To be honest though, I don’t get the impression that anyone at the IRS is looking very closely at these sorts of things.
I think you mean K-1, which means you don’t get to have your own retirement plan. You’re in a partnership, even with the S Corp, and can only use the partnership retirement plan.
I get the desire to avoid the tax man, but much of this seems extreme to me. What is the final goal of all this – to build extreme wealth to pass on to your children? Is that really the best use of wealth? Will children treat your inherited wealth the same way that you – the person that worked so hard for it – will treat it? Historically that seems to infrequently be the case. Don’t get me wrong, we save a ton for later in life – we max out our 401k’s, I get the full $36k Safe Harbor amount in my 401k as a full partner, we use HSAs for medical expenses, make large 529 contributions, and we avg investing ~$250k/yr into our taxable investment account. But our goal is not to just hand that wealth over to our children. They will get some, but really WE hope to enjoy our wealth, both during our working years and during retirement. There’s almost no chance we will run out of money as is, so we don’t have any need to frantically skrimp and save more for retirement. We will certainly pass money on to my kids after we die, but we have no desire to hand enough money to our children that it will trigger the Estate Tax. We plan to donate to much worthier causes than our children who grew up in a very comfortable life and already enjoyed all the advantages that came with. We want them to work and to earn, and to value their own work and earning, not to just expect a massive inheritance. But maybe that’s just us.
These sorts of tax moves pay for some of the stuff we spend money on like The White Coat Investor Scholarship, charitable donations, our kids’ college funds, our upcoming home renovation, and heli-skiing. Thanks for your concern that we might leave enough money to our kids that we ruin them. We’re certainly very cognizant of that risk.
But let’s be honest, the amounts of money being talked about in this post are a tiny fraction of what we’re putting away each year. I’m not ready to be done working, we’re spending money on everything we can possibly think of that will make us happier, and we’re giving away more than we spend to charity. What do you propose we do with the rest if not save it in the smartest way we know possible?
Great article. Will definitely be taking advantage of this.
One part is very confusing to me however: “By going to after-tax contributions for Katie, Katie no longer needs to make as much money as she used to in order to max out the 401(k). ” and this formula: “Well, $37K/20% = $185K + enough to cover her payroll taxes.”
No explanation as to the origin of this formula or why she needs to make so much more money in the pre-tax contribution scenario. Maybe this is something I should know but I googled it and still couldn’t find the answer. Couldn’t find any rules stating that the salary must be X amount before the employer can contribute X amount pre-tax (except that it cannot be greater than $36k or 100% salary). Where are you getting this number from?
Employer contributions can’t be more than 20% of salary. Are you looking for a citation? How about this one:
https://www.irs.gov/publications/p560#en_US_2018_publink10008968
Defined contribution plans.
The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can’t be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals , later.
When figuring the deduction limit, the following rules apply.
Elective deferrals (discussed later) aren’t subject to the limit.
Compensation includes elective deferrals.
The maximum compensation that can be taken into account for each employee in 2018 is $275,000 ($280,000 in 2019).
So you can make larger contributions than 20% (25% of salary, 20% of salary plus the contribution) but you can’t deduct them. Hope that helps.
I was surprised that you wanted to contribute a lot to your cash balance plan. I thought I learned somewhere on your website that the best way to do a Cash Balance plan is to max it out at the end of your career because there is generally a huge drag on fees in the account and you end up being limited on the amount you can contribute once you hit a certain threshold.
I keep rolling money out of cash balance plans every time they close. They’re really just an IRA disguised as a pension.
So as a super saver, would it make sense to start my own Individual Cash Balance plan and then close it every several years and switch to a new provider?
The reason for closure has to be acceptable to the IRS, but yea, that’s the general idea.
Darn, I am kicking myself for not understanding this sooner. I could have sworn I read your blog posts about this before and had not seen this. Thank you for taking the time to explain.
I just went back and read your guest post from Litovsky about the cash balance plan. Do you keep track of the lifetime accumulation limit you had a discussion with Jeremy Palm in the comments section?
The White Coat Investor | October 21, 2018 at 8:39 pm MST
So it’s $2.8M per employer then. Very nice.
No, I don’t keep track. But I’m a long, long way from $2.8M. I think if you roll it over to an IRA/401k the counter starts over again too, but not 100% sure on that.
Love this post! Had been familiar with the Megaback Door from your old post, but had rethought about how much this would now help given the evolutions in my own financial situation.
Is there a reason why you do not utilize a 401(k) with a Roth option? We do this for all of our physician clients. We have also been setting up combined Defined Benefit / Defined Contribution plans with DB contributions in the $165k+ area. I actually had one come back for 2018 with a max contribution of $344k and a recommended contribution of $261k. Granted, this is based on age, and he is 53, but the $165k contributions were for 2 ER physicians that turned 40 this year.
If you’re doing it for ALL your clients, you’re likely doing at least some (and probably most) a disservice. We may eventually do Roth contributions, but we’re also in a very different financial situation than most docs who should be doing tax-deferred contributions during peak earnings years.
But yea, when you’ve got folks saving $300K+ a year, Roth contributions can make a lot more sense than when someone is saving $50K a year.
So, with my current 401K as you commented above, I cannot do the mega back door Roth IRA.
I do save more than what I put into my 401K each year in a taxable account.
If I’m not able to do the mega back door Roth IRA at this time, would it make sense for me to add the Roth Deferral option to our 401K plan?
Or should I seek to have do something else—have our company add another plan —?Defined Contribution, ? Cash balance plan—I do not know much about these, but will seek out your other posts.
Thanks again for help understanding this.
when you have option of Roth deferral versus pretax deferral the choice should be made based on your marginal tax rate, and how you feel about future tax rates. If you’re above the 24% tax bracket the recommendation would generally be stick with pretax.
In the case of after tax – mega backdoor Roth you don’t have that choice of pretax, so the decision is different.
The plan you have already is a defined contribution plan. If you’re a practice owner then perhaps you would look at adding a cash balance plan. You’re unlikely to make that happen if you’re a non owner.
Thank you for the input. As an owner, if I were to add this cash balance plan, what would be the drawbacks to doing it?
Not enough info. This post should help though:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
And yes, you can explore a CBP with the company too. Or just invest in taxable. Hardly the end of the world.
https://www.whitecoatinvestor.com/cash-balance-plans-another-retirement-plan-for-professionals/
https://www.whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/
I currently have a Roth 401K plan with a Cash balance balance plan for a solo office with 10 employees. I have been told that adding the Mega Back Door Roth option to my plan can greatly interfere with compliance in the plan and how much I can put into the Cash Balance Plan.
Does anyone know if this is the case for a small solo office plan design?
I would love to add this option and use it, but my concern is that it will trigger other problems for our plan.
see my response in the forum
I suspect that is true. Once you have employees, this is no longer a do it yourself project.
Curious why Fidelity wouldn’t allow you to invest in their zero-expense ratio mutual funds?
They can’t give me a reason and I keep asking every chance I get. I guess they won’t want my business. No biggie, VTI is just as good (or perhaps slightly better) as discussed here:
https://www.whitecoatinvestor.com/expense-ratios/
How are you able to comply with federal rules regarding non-highly compensated employees vs highly compensated employees? The underlying issue is that the highly compensated employees of a business are not allowed to take advantage of rollovers to Roth IRA much more than the non-highly compensated employees. Convincing the non-highly compensated employees to contribute a large percentage of their compensation to a 401k would be difficult to impossible. Having the practice make such large contributions on their behalf would be cost prohibitive. How do you circumvent this issue? Do you not have any non-highly compensated employees?
Hi Dr. Dahle,
Great Post! Been following you and Finance Buff blog. I am looking into starting my own solo 401k to execute the mega back door Roth from my side gig income.
Background: I currently maxed my employee deferral contribution (19K) with my full time W2 job. They also provide a match (10K). I am also starting a side gig 1099 sole proprietor estimate to earn about (35K) a year. From my understanding, I can contribute to the profit sharing portion (~6K) and to the after taxed portion (~20K = which can be rolled over as ROTH). My total income is also just under the phase out to get 199a deduction.
My question:
1) Is it worthwhile for me to pay the extra fees to get this done? 20K of Roth Money vs. Putting 20K in a tax advantaged taxable and forego the extra fees (CPA, Mysolo410K, etc…)
2) I love doing everything DIY. With my side gig earning only 35K, I have been ok with TurboTax. However, I can see that I will likely need the help of a CPA if I would like to execute this mega backdoor ROTH. Will this be worth it with only 35K of side gig income? A good CPA will likely cost me about $1000-$2000 a year. When will it be worth it? 50K? 100K? >100K?
Thank you for your posts!
-RE
1. Hmmm…..Probably. They’re not very high, especially if that side gig income keeps climbing.
2. I think TFB has a nice tutorial of how to report the MBDR in Turbotax. I plan to look at it before doing my taxes next year. I wouldn’t hire a CPA just for that if you are comfortable doing the rest yourself.
Thank you so much for your reply and kind advice as always! I also love your podcasts.
May I pick at your brain a bit more? I am a novice at this.
1) Let say I have a non-working spouse I named as co-owner of my 1099 side gig. The total business income is 35K. Since she does not have a W2 job like myself, does it make more sense to have her max out her contribution? In this case with 35K salary, She would be able to contribute 19K in pre-tax salary deferral, 6K in profit sharing and forego the after-tax contribution? (only about 1K is left for the after-tax contribution in this case…or can she still max it up to the total limit 56K?, from my understanding, the after tax contribution is still limited to the total business earning).
vs. [Having me doing the mega backdoor + Take the Dependent Tax Deduction.] – Is hiring a spouse easy to DIY or should I obtain a CPA to help set this up?
2) DIY – Should I set up an LLC – S Corp for my side gig if the side gig income ceiling likely will be around 50K or keep going as a 1099 sole proprietor. I’ve been on the fence about this and can see pros/cons of both sides. It comes down to how much time I want to put in to figure this out vs. paying someone to do it for me.
3) I am seriously considering taking CPA classes to improve my knowledge. The tax laws can change so quickly. It is fun to read about it though.
Best Regards,
RE
1) Yes, assuming she is doing legitimate work. You can’t just name her as part owner of your moonlighting gig because she makes one phone call a month and pay her a $200K salary. I didn’t hire my spouse as an employee. She was a partner and then when we changed to an S Corp she became an owner-employee. There are advantages to doing that beyond just hiring her. If you do hire, it isn’t THAT complicated, but I don’t know you well enough to know whether you should get help with doing that or not. I didn’t hire a CPA to help hire my kids. I just did the paperwork myself.
2) I don’t think I’d hassle with an S corp for a business making $50K, especially if you need most of the income to be earned income in order to max out retirement accounts. The point of an S Corp is to make a big chunk of the income be unearned so you don’t have to pay Medicare tax on it.
Thank you for your insight Dr. Dahle.
1) I agree, if its a 50K moonlighting gig, then the spouse is not “really” participating unless the “business” have him/her in supporting roles such as maintaining paperwork, licenses, secretarial duties, schedule management, car maintanance, everything else beside the clinical portion of the moonlighting gig – am I correct? If the spouse is in the supporting role, could he/she be name a 30/70 partner in the business?
2) Also would it be better to file as a qualified joint venture (QJV) when tax time come since it is only husband and wife? With both spouses filing two schedule Cs instead of filing a partnership/LLC tax return to save money/fees? I also understand that the side gig tax burden will increase since it is paying two people instead of one. In this case where the side gig is a clinical one, would it be simply to not involve the non-working spouse at all and do the solo 410k – mega backdoor ROTH for myself with the 50K extra income?
3) However if the 50K side gig is non clinical related such as blogging, could I name the spouse 50/50 if he/she equally participate in the blogging business? Is it also easier to do the QJV route and maxing out the spouse contribution first instead of doing the mega backdoor Roth?
Bests,
RE
1. I don’t know that the IRS has stated specifically, but you’d best be prepared to argue your case whatever you do so you better pick something an auditor would find reasonable.
2. Hmmm…interesting tactic. We didn’t consider it. I filed a 1065 (partnership return) when we were a partnership. I’d have to do more research to answer that one. Certainly avoiding the 1065 is a worthy goal! Yes, you are almost surely going to pay a lot more money in SS tax doing this. It might not be worth it just to increase retirement account space. The income would be the same, the expenses would be less, but you’d have to invest in taxable instead. But at just $50K of income, I don’t think I’d bother trying to get my spouse involved. Your call of course.
3. Sure, why not?
Looks like there is an error for Katie’s 401K. She can do the employee 19K but not the 37K employer match, this is because you are setting her salary at ‘56K plus enough to cover the self employment taxes’ but that employer portion which you are incorrectly calculating as 37K is actually the lower of 37K or 25% of her compensation. You’ll need to set her compensation to approx 150K to make it work and that’ll crush the SS tax you were hoping to save.
We’re not doing an employer match. Did you miss the rest of the article? Employee after-tax contributions are not employer contributions.
Wouldn’t comment without reading the entire article 🙂 well written and you made some great points. However, the employee portion is 19K correct? Where do you get the 37K? Are you suggesting an employee can do more than 19K in a 401K without an employer match ?
Yes.
$56K-$19K = $37K.
If the 401(k) plan document allows after-tax employee contributions, then yes.
to further clarify, employee after tax (non Roth) contributions are limited to the lesser of, for 2019, $56k or 100% of compensation, minus any employee deferral contributions and minus any employer contributions (profit sharing, match)
The Finance Buff has an excellent spreadsheet that you can use to play around with numbers
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
Very helpful. I must have missed this, but were you able to get $37K employer contribution in your WCI and almost that amount in your partnership employer 401k contribution in the same year?
Do you explain that somewhere else on your site? Thanks.
I think you’re looking for this post:
https://www.whitecoatinvestor.com/multiple-401k-rules/
This year we did not do a $37K employer contribution in the WCI 401(k). We did after-tax employee contributions instead.
Great, thanks! That post looks very helpful.
Thanks for the super helpful article!
I set up a solo 401k with the goal of doing both employer contributions and after tax employee contributions that I would backdoor, given I already maxed out my traditional 401k 19k employee contribution. One question that I had was around timing: am I allowed to make contributions before I actually have self-employment income? For example, if I know for sure I will have $30k of SE income later this year, am I allowed to make both employer tax deferred contributions and employee after-tax contributions (which I’ll convert right away to a roth as my plan allows for an in-plan roth conversion) for the maximum allowed amounts today or do I need to wait for that money to actually hit? This was not something I ever needed to consider in my regular 401k
I’ll bet the technically correct answer is you’re supposed to wait until you make the money. But I can tell you for a fact that nobody is passing the timing of your contributions along to the IRS….ask me how I know.
That said, if you’re an S Corp (or filing as one) and filing 941s each quarter, you’d better wait until you make the money because then YOU are passing along the timing of your contributions to the IRS.
Thanks a lot! I am filing as a sole prop
Jim, I contribute non-Roth after tax contributions to an employer 401k and last I did it the in-service rollover to my Roth IRA, I was told I could do it online through fidelity.
So this time around I did it and thought I checked my account numbers carefully, but apparently not carefully enough because the gains went to the traditional IRA as expected but the after tax ended up in a regular taxable brokerage account. This was just a few days ago. I’ve maxed my regular “backdoor” contributions for the year already.
I’m going to call a tax expert, but I’m trying to figure out what my options are. Fidelity says they can’t undo the transaction and I’m sure that if I just move the money into the Roth it’ll look like an over contribution.
Any thoughts here?
Fidelity screwed up the transaction,right? (You didn’t tell them to withdraw money from your 401(k) did you?) If so, they can certainly undo it and I wouldn’t take no for an answer on that one.
If you really did a 401(k) withdrawal, you may have a penalty too.
I checked each screen carefully and it had the right accounts, but I didn’t screen shot each one and they’re saying it was the taxable brokerage that I indicated. It withdrew the after tax amounts into the taxable brokerage but the “gains” into the traditional Ira.
I’ll call them again.
Is there a 60-day rollover sort of rule that I could use here?
I don’t think the 60 day rule applies to 401(k) withdrawals, but you might be able to claim the plan doesn’t allow those so they shouldn’t have allowed you to do that and must reverse it.
Thanks for your thoughts. – spoke to a CPA, a retirement plan advisor and back with Fidelity. All were in agreement that the 60 day rule did apply to withdrawals from 401(k)s including the after-tax non-roth contributions. Fidelity initiated their process for indirect rollovers into my Roth IRA.
In this case, Fidelity indicates they will issue the usual 1099-R but now showing an early withdrawal with Box 7 showing Code 1 (no exception applies -because at the time of withdrawal there is no exception since they don’t “know” what i’ll do with the money). However, they will also issue a 5498 with the amount in Box 2 (showing this is a rollover contribution).
They categorically refused to “undo” the transaction because their records show that I selected a taxable brokerage account for the withdrawal (even though I used their rollover interface tab).
It’s all I have energy for at the moment. The amount isn’t small but it isn’t enormous either so it’s just a moderately expensive lesson, but all in all probably one of the cheaper ones I’m sure I’ll learn in my life. I’ll swing back around at tax time and update you on how it looks in TurboTax.
So that works out fine then I think. What’s the expense? There’s no tax cost to a rollover.
Well assuming it works out as planned then the time I spent and will be billed by the CPA for any extra time it takes Come tax time when I have them review the turbo tax documents.
If it doesn’t work out, then all that and the penalty and the loss of the tax advantaged status of that money.
If there’s a lesson for me it’s do that transaction over the phone and more frequently so that the amounts are smaller. My plan would let me do it every paycheck if I wanted. Because I’m employed I am limited to 10% contributions per paycheck due to some ERISA provision so I can’t even front load it.
I am in private group practice and covered by a 401k for the practice. I cover call for one hospital in town for a different specialty then the one I practice in our group practice and being payed with a 1099. It does not seem to be a controlled group to me Since it is a different specialty. Am I right? I just have hard time finding a CPA to know about this. And mysolo401k does not know really when I asked. Thank you.
You should be able to do an i401(k) for the 1099 income but probably only be able to put 20% of your self-employed income into it as a tax-deferred contribution (more via Mega Backdoor Roth) if you use the employee contribution in the practice 401(k). Surprised Mark Nolan couldn’t answer that one for you. Maybe you didn’t ask it the right way. More details here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Thanks for the very informative post.
Am thinking of moving ahead with the mysolo401k plan mentioned above before TY 2019 ends. Revenues on the side gig S-corp are increasing to where they may now justify this. Would appreciate confirmation on these two points:
1) Is the 56K total 401k limit on the side-gig reduced by employee tax-deferred standard 401k withholdings in the day job 401k? Or are these completely separate calculations? I believe they are separate based on posts above.
2) Are all earned income streams (in this case W2’s) taken into account when calculating the maximum after-tax contribution to a customized i401k plan for a specific entity, or just the earned income associated with that particular entity? I believe only income from the side-gig can be applied towards contributions to the i401k.
Particulars
– California W2 day job + side gig pro-corp taxed as s-corp
– Day job: already maxed 19K employee withholding to 401k. ~5K match by employer
– Side gig: no EE withholding, ER match @ 25% of W2 providing $2,500 tax deferred to date; I have paid myself a minimal salary throughout the year so I can issue a bulk W2/K split in December
With respect to question 1 above, there is $53,500 of space left in the s-corp 401k (56 minus the tax-deferred 2,500 employer contribution) for TY19. I can’t withhold any more on the EE side since I maxed out on the day job. If I were to try to fill this $53,500 using additional employer contributions, it should require 53,500/25% = $214K of additional W2 salary. I will be nowhere near that income level this year on the side gig so I’m checking how much I can eke out with the mega backdoor. I believe based on prior posts that neither my EE contributions, nor the ER matching on the day job will reduce this 53,500 further, meaning that I could pay myself a total of ($53,500 + whatever my payroll taxes would be) in W2 wages in mid Dec, only to immediately contribute all of that after-tax to the new 401k before the end of Dec. Am I getting that right?
With respect to question 2 above, I’m assuming that only the W2 wages emanating from my S-corp could be used in determining the maximum after-tax contribution to the S-corp’s new 401k. Or do people think this earned income calculation is based on all W2 wages from all sources, which would allow me to hit the 53,500 after-tax contribution max to the s-corp 401k with a much lower W2 wage, largely using income from the day job? The latter seems like a free lunch so I’m assuming it’s disallowed.
Thank you!
1. No.
2. Just the self-employed income, and if it is an S Corp, just the salary paid by it.
Thanks for the response.
One follow-up question as I’ve been trying to implement this.
My final Dec payroll will result in a total of 56K in S-corp W2 wages for TY2019 and the plan is to issue a 14K profit sharing (25% of 56K) contribution and the remainder (56k-14k = 42K) as an after-tax contribution.
Is that compliant or is the 401k contribution limit reduced by some factor of 1/2 SE tax or fed/state withholding, which would force me to actually pay myself MORE than 56K in W2 wages in order to open up the possibility of 56K of 401k after and pre-tax contributions.
Note that there are other fund sources (savings, s-corp distributions, other job income) to supplement the reduced net W2 income to allow me to make the 42K after-tax contribution. Trying not to screw this up the first year I attempt the mega backdoor.
Well, I hope the S Corp made more than $56K if you got $56K in wages and had a $14K employer contribution. That would require at least $70K.
But to answer your question, no you can’t put money that went to the tax man into the 401k. I avoid this issue by making sure Katie gets paid a few thousand more (we’re paying SS tax for her too) but I don’t try to avoid every penny of Medicare tax like you’re trying to do. Consider a future audit:
“So why did you pay yourself exactly $56K again?” Might not look so great.
Yes, the S-corp made more than 56K, but not that much more. Was dormant most of the year and revenues spiked the last month and a half. Have not run Q4 payroll yet.
For TY 2019 I’m projecting around 120K in gross revenues. After all operating expenses, including the planned 56K final w2 salary, net profit drops to ~ 32K. Minus the potential 14K employer contribution leaves ~ 18K profit. The original intention was to take a 10K distribution so that I have a fairly conservative distribution/salary split of 18%/82%. Given the actual hours spent on relevant work, the hourly rate is well within reason so I’m not concerned about an audit related to trying to minimize medicare taxes.
That being said, my main concern is that I’m incorrectly calculating my maximum potential after-tax 401k contribution and have received conflicting info from Mark N; his take is that based on 56K in W2 wages I could contribute the 14K as the employer profit sharing and 42K as the after-tax contribution. Out of paranoia I asked here again and am now attempting to reconcile this difference before I run final payroll and potentially cause problems.
To clarify, when you say “no you can’t put money that went to the tax man into the 401k” are you referring to FICA taxes or income taxes or both?
If FICA, then presumably I need to increase w2 salary to account for the employee side reduction and am looking at a few thousand; my last payroll run will have an employee side FICA tax rate of ~ $3900 for SS/Medicare/SDI. That’s doable within the revenues I have and I can increase my W2 salary accordingly so that the post-FICA but pre-withholding amount ends up at 56K.
If, on the other hand, you’re saying that I need to increase my w2 salary to account for federal/state withholding, then the numbers are significantly higher and given corp revenues it will no longer be possible to contribute the 401k max of 56k this year.
Are either of these scenarios reflective of your current understanding? I’ll keep reading in the interim to see if I can figure out what I’m missing.
Thank you.
FICA for sure but I don’t know that I’m 100% sure about the income taxes. There don’t seem to be any really clear guidelines on this out there so I’ve always just been grateful that it hasn’t been close for me. I think you still made enough with the S Corp to max out the $56K, it’s just a question of how much of that can be tax deferred. Might be easier to just do it all as MBDR and not worry about it.
Indeed, helps to have far more revenue! Perhaps next year. And completely agree that there are insufficient written guidelines. It’s almost like the grey areas are there on purpose.
With respect to the FICA adjustment, is your understanding that this would reduce the employer match – meaning I could match no more than 25% of W2 wages *minus* some portion of FICA? To be honest up until this point I have always issued an ER match of exactly 25% of my W2 payroll, regardless of FICA taxes, and have not been told otherwise. I also don’t recall seeing this FICA reduction on any of the online calculators for 401k contributions but I’ll admit I may have missed it.
Or do you mean the FICA adjustment would reduce the maximum I can contribute as an employee voluntary after tax (MBDR) amount to: (W2 wage or 56K, whichever is lower) – ER match (no more than 25% of W2) – Employee FICA?
As far as doing it all as MBDR, this is true. But living in a high income tax state I’d still prefer to shelter some of this income in case I move later in life and do roth conversions in a lower/no tax state. Also, if you are correct that FICA taxes would reduce the MBDR amount (second scenario above) then I’d have to pay myself an even higher W2 than splitting it between pre-tax ER and post-tax MBDR.
With respect to not including income taxes, I wonder if it’s analogous to a situation in which someone has very little (say 6K exactly) earned income but sufficient non-earned income to still pay income taxes. Can’t this person still contribute 6K to an IRA by way of meeting the 6K requirement, regardless of whether or not federal/state withholding reduces the 6K in a take-home check? I thought the individual could still use revenue from other sources and/or savings to make up for that reduction to max out a 6K contribution to the IRA, and the IRS doesn’t seem to care that the actual take-home earned income is less than 6K. If the IRS is fine with that, one could argue it’s the same as a MBDR in which somebody is paid 56K via w2, has ~ 23K withheld, but still maxes out the after-tax contribution using revenue/savings from elsewhere to supplement this “lost” 23K. I may be utterly wrong about this comparison and my assumptions, admittedly.
Yes, minus the employer portion of FICA but not the employee. As you are well aware, I could be wrong on this as the guidelines are not clear at all.
You’re asking great questions I would love to have definitive answers on but haven’t really seen any over the years. I agree the IRS doesn’t care where you pay the income taxes from, but they do care where you pay the employer portion of FICA taxes from.
Completely understand that we’re in a gray area and very much appreciate you humoring me.
May have identified the cause of what I previously thought was a disagreement in our numbers – we may actually be saying the same thing, in different ways.
I think you’re saying that an employer cannot match a full 25% of an employee’s W2 wages in profit sharing IF the employer ALSO does not have enough cash within the company’s coffers to cover the ER half of FICA; this is as opposed to saying that the 25% match is applied to a W2 wage reduced itself by the ER half of FICA.
Here’s an example that will help differentiate the positions: pretend the only payroll run the entire year is a 56K w2 salary with no salary deferral. Straight 7.65% ER FICA is $4.284 (ignore unemployment). The cost to run that payroll and pay taxes on the employer’s side is then ~ $60,284. The goal is then to add ER profit sharing equal to $14,000. The two related questions are 1) how much money does the company need to have in profit to do this and 2) what W2 wage needs to be paid to actually hit this $14K purely through profit sharing.
I’m hoping your point is that the employer cannot profit-share $14,000 (25% of 56k) unless the employer has 56K + $4,284 + 14K = ~74K of cash profit within the company. That’s the less restrictive interpretation and seems more in line with an earlier comment of yours.
I’m also hoping your interpretation is NOT the far more restrictive scenario in which the 25% profit sharing limit is applied to the W2 wage AFTER it is reduced by employer FICA taxes. In this scenario in order to get a 14K employer sharing contribution one would solve for W2 in the equation below:
(W2) * (1 – 7.65% FICA taxes) = $14,000, the solution of which would be $60,639 in w2 wages, so that W2 minus ER FICA is exactly equal to 56K. If that reflects your understanding then in order to do a 14k match the employer must have profit of at least $60,639 in W2 wages, plus $4,639 in FICA taxes, plus 14K for a total of ~79K.
The first scenario is more aligned with your understanding of the regulations, correct? Meaning that as long as the company itself pays for the ER portion of FICA, then the company will also be able to match up to 25% of an employee’s W2 wages.
Here is my thought on your December 5, 2019 at 8:54 pm MST comment –
I agree with Mark N that your 401k contribution/deferral limit is based on W2 box 1*/3 number. But I am no tax expert.
That said, may I suggest that you skip federal tax withholding on your S-corp paycheck. Instead, file individual quarterly estimated tax outside payroll. Then you will avoid any potential ‘complication’ with the federal withholding.
Apologies if this has been addressed already, but just when I thought I had my mind wrapped around the MBDR I get lost again. I am making the $19K tax-deferred employee contribution into my hospital (W2) 401 (k). I have a separate 1099 job and associated solo 401 (k) that will allow the MBDR per the plan document to the full amounts. My 2019 1099 income will amount to only $20K employer contribution. Can I instead make a $56K after-tax contribution into my solo 401(k) Mega Backdoor Roth IRA and forgo the Employer contribution?
I’m confused because I thought I could only make a total of $37k contribution after my employee contribution
Yes, Or you could do $20K employer and $36K MBDR at the i401k and $19K employee contribution + match at the hospital 401k.
Wouldn’t that $20k employer contribution reduce my 199a (QBI) deduction? 2019 will be last year I qualify for the 199a
And thanks for all the guidance !
Yes. It is a business expense and thus reduces ordinary business income. Your 199A deduction would be $4K less. This is the reason Katie and I started doing MBDR contributions this year.
Two questions:
Been doing Back Roth IRAs thru Vanguard for years for my wife and I including in 2019. Recently found out our employer allows after tax contributions, in-service withdrawals while still employed and the money can be rolled over directly into our respective Vanguard Roth IRAs.
1) Can you do both a Mega Back Door Roth IRA and a regular Back Door Roth IRA in a fiscal year (i.e, in my case in 2019 where we both already contributed $6k each to our Back Door Roth IRAs in Jan 2019 and we already maxed out our employee deferral in our 403b for the year – $19k and are awaiting our employer match ~$14k). So I assume we can both contribute ~$22K Mega Back Door Roth IRA contribution.
2) At tax time, I assume you just fill form 8609 because of Back Door Roth IRAs which I’ve always done. Do we have to fill out anything additional if we also do a Mega Back Door Roth IRA in the same year (my assumption is no because it was an after tax contribution that was rolled over into our respective Vanguard Roth IRAs – so this is not a conversion). Is this correct?
Thanks! Appreciate everything you do. Your site has been a huge help to our financial success.
1. yes.
2. 8606 for BD Roth IRAs. Not sure how you document the MBD Roth IRA. Haven’t done it yet, but I bet TFB has a tutorial on it….
Yup, he does…
https://thefinancebuff.com/mega-backdoor-roth-in-turbotax.html
I am trying to understand if there is a limit to after tax contributions. If my 1099 income is let’s say 40K and I would like to make all of it as after tax am I able to? What are the limits for after tax? thank you.
Depends on the plan, but the IRS limits for 2019 are $56K.
Does having a Roth TSP account count against either a backdoor Roth or a Mega backdoor Roth?
No. And neither does a tax-deferred TSP.
Thanks!
It’s hard for me to understand what is so beneficial about a “backdoor Roth IRA” or the “mega” version — how is this any better than just maxing out your workplace’s 401k and putting in after-tax dollars into the Roth 401k option rather than the regular tax-deferred 401k option? Additionally, I have not seen you point out that 401k funds benefit from both state and federal protections where IRA funds do not. Is all of the talk about the mega and regular “backdoor Roth IRA” only for folks who don’t have a Roth 401k option? You can always move Roth 401k funds into a Roth IRA later if you’d like. Thanks in advance for sharing your wisdom.
You can only put $19K into the Roth option. Plus, those contributions come from salary and don’t reduce the 199A deduction.
Most states protect IRAs similarly to 401(k)s, but let’s be honest, the likelihood of you needing either protection is very, very low.
Dear WCI,
Thank you for existing! Looking for some guidance here…
In 2019, I weaned off my W2 job (cut down to part-time and then ultimately resigned altogether by August, 2019).
Total W2 gross earnings for 2019 were ~$40k.
Contributed ~$8k to that company’s 401(k) plan for 2019 before I resigned.
Have ~$150k total still left in that 401(k) that I haven’t rolled over into anything yet.
As I was cutting back to part-time there, I started doing locums work as a 1099 and earned a gross income of ~$300k for 2019.
A few years ago, I set up a S-Corp for my 1099 locums work, and am doing payroll.
Just started reading sites like yours and teaching myself more about different retirement account options as a 1099 independent contractor…
In March 2019, opened a Vanguard SEP-IRA AND a Individual 401(k) for this S-Corp (realized I was too late to contribute to the Individual 401(k) for 2018, but went ahead and contributed ~$10k to the SEP-IRA for 2018 – that was ~20% of my gross 1099 earnings for 2018). The plan was that in 2019, I would roll over this $10k from the SEP-IRA into the Individual 401(k).
But this week, after reading one of your other posts, I learned that this might be problematic at Vanguard so I opened a Individual 401(k) account at E*Trade and also set up a Roth Individual 401(k) linked to that account.
So here are my questions:
1. When I roll-over the ~$10k from my Vanguard SEP-IRA into my new E*Trade Individual 401(k), can I direct it to the Roth Individual 401(k) linked to that account?
2. For 2019, I will contribute the maximum $56k to my new E*Trade Individual 401(k). But how much of it can be in employee contribution and how much can be employer contribution? (Remember, I already contributed ~$8k to my W2 company’s 401(k) plan for 2019 before I resigned). So $19k – $8k = $11k? The remainder ($56k – $11k = $45k) can be contributed as the employer contribution? Do I have this right?
3. What portion of this can I convert into the Roth Individual 401(k) linked to that account?
4. How can I rollover the $150k I left behind in my old W2 company’s 401(k) into this new E*Trade Individual 401(k)? Can I even do that? Can I somehow put it into the Roth Individual 401(k) linked to that account?
I apologize for this long post and list of questions, but I find you more reliable and knowledgeable about these matters than even most CPAs I’ve spoke to. Thank you, in advance, for all your guidance. You are DA MAN!!
– Raul
1. Dunno. Ask eTrade. You do realize it’ll cost you taxes right? If you want to do a Roth conversion, why not just roll it to a Roth IRA?
2. You already used $8K of your $19K employee contribution, so $11K. The rest must be an employer contribution, but it looks like you made enough there to justify maxing it out. You need to learn about the 199A deduction by the way, and how employer 401(k) contributions from your S corp will affect it. You’re in a very complicated income range for getting it all right.
3. Again…it’s up to eTrade whether that is possible but why not go to a Roth IRA if you want to do Roth conversions?
4. Just fill out the eTrade rollover paperwork. Should be no big deal. Again, if you want to do a Roth conversion, why are you going to a 401k instead of a Roth IRA? Are you trying to get a wee bit more asset protection or something?
Thank you for your reply.
1. I do have a personal Roth IRA also at Vanguard that I’ve been contributing to (Backdoor conversions) since becoming an attending. Can I just roll the SEP-IRA into that? And then start fresh with the Individual 401(k) at E*Trade for 2019?
And if I did that, can I still contribute $6k (via Backdoor conversion) for 2019 to that same personal Roth IRA at Vanguard?
3 and 4. I didn’t consider rolling over these company retirement accounts (SEP-IRA and old W2 company’s 401(k)) into a personal Roth IRA because I wanted to keep them under my S-Corp’s retirement accounts rather than put them in my personal retirement account (which is what I think you’re referring to when you say “Roth IRA,” correct?).
Plus, I didn’t want to trigger a taxable event — I recognize that rolling over any pre-tax/tax-deferred account into a “Roth” account will trigger a taxable event — So if I roll it over into just my new E*Trade Individual 401(k), I would be steering clear of having to pay taxes, correct?
I anticipate traveling more and working a lot less in 2020 so maybe I’ll wait until 2021 to roll over any funds into the Roth Individual 401(k).
Great Article! I am not a doctor but your website has become a go to resource for all my financial planning related work. I read your article on backdoor roth which explains the tax forms 8606 etc – amazing to get end to end guidance at one place.
About mega backdoor, can you please provide (some may be limited details) on tax forms required?
Thanks
Doing it this year myself for the first time, so I’m sure I’ll do a post about it. Until then, check The Finance Buff.