I don't hear about new ideas very often, but here is one that a few people might find very useful. I call it the “Mega Backdoor Roth IRA.” There are several variations. Two of them work well for selected people, but after discussing the third with several retirement plan experts, it probably isn't a viable option.
Most of Us Don't Need the Mega Backdoor Roth IRA
Prior to getting into the variations, I need to point out that most physicians and most Americans probably don't want, don't need, or can't have a Mega Backdoor Roth IRA. An employee without the ability to contribute after-tax (not Roth) money to their 401K can't have one. A typical physician not maxing out his 401K and other tax-deferred options is probably better off with more tax-deferred space rather than more Roth space. A regular old boring Backdoor Roth IRA will allow most docs to have some tax diversification in retirement. A practice owner with multiple employees probably can't do a Mega Backdoor Roth IRA (the original impetus behind writing this post) due to profit-sharing laws.
So Who Should Consider Using a Mega Backdoor Roth IRA?
Three people.
- An employee with a very unique 401K.
- An independent contractor physician with no employees who needs more Roth space and is willing to give up tax-deferred space to get it.
- A very high-income physician who expects to still be well into the top bracket in retirement (i.e. his effective tax rate on tax-deferred accounts is very similar to his marginal tax rate during his working years.)
Variation # 1 – The Employee With a Unique 401K
Some 401Ks not only permit $17.5K of either tax-deferred or Roth contributions, but ALSO permit you to contribute your own, after-tax money into the plan up to the $52K limit. A good example of this is the TSP for deployed military doctors. It isn't a particularly good deal to just contribute after-tax money, UNLESS you can then get that money out and convert it to a Roth. Voila- A Mega Backdoor Roth IRA. Instead of only being able to contribute $5.5K per year, all of a sudden you can contribute $34.5K (plus the $5.5K in your personal and $5.5K in your spousal IRA.) If you're over 50 and put your first $23K (remember the $5.5K catch-up contribution) into a Roth 401K, you could potentially put up to $65K per year into a Roth IRA.
Here are the requirements:
- The plan must allow for after-tax contributions above and beyond the $17,500 employee contribution limit, preferably up to the $52,000 limit. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA.
- The plan must allow for non-hardship in-service withdrawals of after-tax contributions.
- The plan should prohibit non-hardship in-service withdrawals of tax-deferred contributions (not mandatory, but a useful feature.)
- The plan should allow for “lump sum” contributions (not mandatory, but useful.)
Even if your plan doesn't allow in-service withdrawals (like the TSP), if you are separating soon from the company (or military), you may be able to isolate that basis and accomplish the same thing like I did after I left the military. This is a great deal for someone who has limited tax-protected (and asset-protected) accounts but would like to save more for retirement. Unfortunately, most 401Ks don't allow after-tax contributions. Check and see if yours does. Be sure the person you're asking understands you're not talking about Roth contributions, but contributions above and beyond the $17,500 limit.
Variation # 2 The High Income Independent Contractor
I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. This is because you can max out an Individual 401K on less money, and 401K money isn't counted in the pro-rata calculation you must do when doing a regular old Backdoor Roth IRA. However, if you wish to do the Mega Backdoor Roth IRA, a SEP-IRA is probably the best option, since I don't know of an Individual 401K that allows both after-tax contributions and in-service withdrawals, although I wouldn't be surprised to see one that allowed in plan conversions, which are essentially the same thing. Typically, the person doing this is going to have a very high income, far higher than the average doctor, and would prefer Roth contributions to tax-deferred contributions.
Here is how it works:
- Contribute your $52K to a SEP-IRA like usual. You can make this contribution anytime between January 1 of the current year and April 15 of the next year.
- Convert your entire SEP-IRA to a Roth IRA. On your taxes, you'll deduct your SEP-IRA contributions, then pay tax on the conversion, but the net effect will be like contributing $52K to a Roth IRA. Be sure that you do your conversion prior to December 31st, as you do not want any money in the SEP-IRA on December 31st, lest you screw up the pro-rata calculation for your additional Backdoor Roth IRA.
- If you are concerned about the Step Doctrine, wait a few months between contribution and conversion. The tax burden won't be that much higher and it won't be that much more complicated.
Variation # 3 The Practice Owner's Uniquely Structured 401K
I've heard from a couple of people on this one, and the consensus seems to be that it is illegal, although if someone has some information showing that isn't true, I know some people who would be very interested.
The practice owner starts a 401K structured just like the one in variation # 1. However, instead of an employee, you are now the owner and responsible for the match and any profit-sharing contributions due to your employees.
You take these steps:
- Max out the employee contribution ($17,500) in either a Roth or traditional tax-deferred manner.
- Then contribute another $34,500 as a lump sum.
- Next, do an in-service rollover/transfer of the after-tax money to a traditional IRA. If the plan is written properly, you do not, and in fact cannot, withdraw the tax-deferred employee contribution. It stays behind in the 401K.
- Finally, convert the entire traditional IRA to a Roth IRA. This works just like the Backdoor Roth IRA, and you need to make sure you do not have any other traditional IRA, SEP-IRA, SIMPLE IRA money as of December 31st of that year. If you transfer directly to a Roth IRA (now allowed), then you can even have traditional/SEP/SIMPLE IRA money on the side.
When completed, you end up with $17,500 in the 401K and $34,500 in a Roth IRA. This allows you to tax-protect and asset-protect just as much money (more on an after-tax basis) as you would with a profit-sharing plan ($52,000 per year, more if you're over 50). The point of this plan is to save on any profit-sharing contributions you would have to make for your employees, (a significant expense for a practice owner employing nurses, mid-levels, or other doctors,) although you would still be required to pay for plan expenses and any regular 401K matching contributions. Of course, the employees may not be very appreciative of that, so you might not want to mention it. At any rate, I don't know of any retirement plan administrators willing to set up a small practice 401K into which the owner can make after-tax “employee” contributions, so it isn't much of an issue anyway.
What do you think? Do you use a Mega Backdoor Roth IRA? Would it be useful to you? Comment below!
I am a little lost. I’m self employed and contribute maximally to a SEP IRA. I’m in highest tax bracket. If I convert to a ROTH now, then I pay taxes at highest bracket to convert but then grows tax free. If I leave as is and pay taxes as I withdraw in retirement, then I pay less taxes because I’m in a lower tax bracket. So why convert? I feel like I’m missing a significant point here.
You’re not missing anything. That’s generally the right thing to do. In fact, you may be even better off with an individual 401(k) + backdoor Roth IRA than your SEP-IRA.
But for someone who WANTS to maximally contribute to a Roth account, making your full contribution to a SEP-IRA, then converting it does that.
Got it. I think I will likely convert all IRA accounts to 401K. If I do, to be clear on the plan, I continue to contribute $53K to 401K pretax. Then I can contribute $5500 (+ spouse $5500) to IRA and convert to Roth. Can you help me understand if there’s a benefit to (or even option of) converting some of the 401K to IRA then Roth given current tax bracket. Could the account feasibly grow enough to make conversion worth it so as not to pay taxes on growth? Or is there a reasonable likelihood that taxes may continue to rise such that “low” bracket on retirement may not be dissimilar to current bracket? Would love your insight on this. Thank you!!
You’re just asking whether a Roth conversion makes sense for you right now or not. Chances are that it doesn’t if you are in your peak earnings years, but it’s a complicated question that has to take a lot of factors into account, including some that are unknowable (like future tax brackets.)
@WCI Thanks for the great post. I am self-employed on a 1099. Does this mean that, in 2020, using an individual 401(k) and SEP-IRA + Roth IRA combo, I can contribute a total of $114,000 into my retirement accounts?
401(K): $57,000 pre-tax
SEP-IRA: $57,000 pre-tax –> transfer to Roth IRA (then pay taxes on that).
That’s HUGE!
You can’t max out a SEP-IRA and an individual IRA for the same (or related) companies in the same year. Sorry. One or the other.
WCI – I think I understand the mega-backdoor Roth, but wanted to clarify to make sure. My 401-K permits after-tax (non-Roth) contributions and in-service withdrawals. Furthermore, the after-tax contributions and their earnings are isolated in an after-tax sub-account within my overall 401-K. So, I think I have an ideal situation to do the backdoor Roth.
My plan would be to make after-tax contributions during the year, then request an in-service withdrawal near the end of the year, directed to an external Roth IRA, or maybe split the withdrawal to Roth for the after-tax contributions and traditional IRA for the after-tax earnings. My question for this approach – do I still have to have zero balance in traditional IRAs? My thinking is no, since I’m funding the Roth through my 401-K and not by converting a traditional IRA…?
Great question. I guess if you go directly from a 401(k) to a Roth IRA you’re good, but I’m not sure you can do that. If you have to stop in a traditional IRA mid-way, then you’re going to have to do an 8606, and it’s going to want to know the IRA balance on Dec 31st.
Would an intermediate stop in a traditional IRA be required by a particular retirement plan, or IRS regulations?
I don’t think the IRS requires it, but if you’re going to do it, I would suggest a more definitive source. I haven’t looked it up at IRS.gov and I’m not sure you could find it there specifically for a Mega Backdoor Roth IRA situation. But the last couple of years you have been able to go directly from a 401(k) to a Roth IRA.
Right – I’m just in planning/brainstorming mode now. Once I have what I think is a solid plan, I’ll run it by our tax advisor to make sure.
Thanks
For those with a 401k or 403b that allows both after tax contributions and in service withdrawals, the ideal situation is if your plan also has a Roth 401k/403b. Then you can role over the after tax contributions immediately to the Roth 401k/403b from the pretax 401j/403b. Two points: do it immediately or taxable gain will start to accrue (Vanguard facilitates this with a one screen transfer.); if you are over 50, the 6k plus up does not count against the 54k total.
Here is a neat trick. If your employer separates its contribution/ match (call it Plan 1) from your contribution (call it Plan 2), then you get another $54k ceiling for Plan 1 in addition to the one for Plan 2. The rule set on in service withdrawals may be different. In mine no direct Roth rollover is allowed, so Ihave to transfer out to an IRA and transfer back in to the 403b Roth.
Interesting question. I am a S-Corp employer with a private practice 401(k). I am the owner. I may do some moonlighting on the side at an entity that I have no ownership interest 1099’d). Would I be able to do a solo 401(k) for that work? It would be nice to mega backdoor outside my practice 401(k).
No. You own both businesses 100%, so they’re a controlled group. If you were an employee (W-2) of the other entity and they offered you their 401(k) then you may be able to use two.
This year I did Backdoor Roth for my wife who is a stay at home mother. She did a minimal amount of internet based contact work so that we could set up a solo 401k. Can we do thus also for her?
Do what exactly? Set up a solo 401(k)? Yes. But you wouldn’t be able to make very large contributions to it if she has minimal income. It may be useful to have somewhere to transfer a traditional IRA though.
Some plans, such as mine, allow for only in-plan roth conversion. In other words, I contribute 18K to pre-tax (or roth 401k), and up to 36K to after-tax 401K. The plan allows to convert the after-tax 401K to in-plan Roth 401K (not roth IRA). After my employment is terminated, however, I can convert the roth 401k to a roth IRA.
Does this sound like a good idea?
Sure does. But it’s hard to say for sure without knowing what your other uses for that money are. For instance, if you had a 29% credit card, paying that off would be a better use of your money.
Hey WCI,
Just wanted to clarify the tax implications of the mega back door roth. If your plan allows only post tax contributions to be withdrawn while in service and they are directly rolled over to a Roth, the pro-rata tax calculation similar to backdoor Roth does not apply correct?
That’s right. Cool 401(k) eh?
Dang, I thought I had a terrible plan because I didn’t get any match , but turns out this is great!
I’ve NEVER had a retirement plan with a match in my entire career.
Hi,
Looks like we can do a Mega backdoor Roth IRA through my wife’s 401k. However, she only makes 55k/yr. Can I still max out her 401k with 18k traditional and 36K after tax, to roll into IRA? Not sure if there is a minimal income needed to max the after tax contributions like there is with traditional or Roth contributions.
thanks
Seth
Read the plan document. It should say. If it allows her to contribute $54K on an income of $55K, then it’s okay. I don’t think the “20% of gross” that applies to pre-tax 401(k) employer contributions applies to after tax 401(k) contributions. Hopefully if I’m wrong about that someone will be along to correct me.
Thanks for the great articles WCI. Does this work for Vanguard Small Business 401K?
I think you need a custom plan document to do this at Vanguard.
Hi WCI,
My husband and I currently own a small practice (5 employees) and we have set up a Simple IRA. We are able to contribute the max of $12,500 each to this plan. We also are maxing the $2000- 529 state deduction (times 3 kids) and $6750 in HSA. We have extra money to contribute and we are not eligible for the Roth. What is the next step?
You can either put in a 401(k)/profit-sharing plan +/- cash balance/defined benefit plan (hire a professional to give you advice given that you have employees) or you can just invest in a taxable/non-qualified account.
You also need to learn about the Backdoor Roth IRA if you think you’re not eligible. Chances are that you are, you just need to go through the back door.
Can I do a backdoor Roth if I have a Simple IRA? Is a small business 401k worth the expense ( I was quoted around $2500/year).
Good point. You can’t have both a SIMPLE and do a Backdoor Roth Conversion (you can still make the contribution) each year. $2500 a year for a 401(k) is pretty cheap if that is everything. Hard to say if it is worth it without a professional taking a look and doing an analysis. Do you want to do more for your employees for retirement? If not, it may very well not be worth it.
If setting up my own small business 401k, do you know what companies I can use to set up a mega backdoor Roth in the 401k I create. Is this possible?
I think it would have to be a custom plan. I think Kon Litovsky does those through Vanguard but you’d have to shoot him an email and get a study done of your situation.
WCI: What a great discussion and site. I am happy I stumbled into your website!! I’m just about ready to pull the trigger on setting up a Mega Back Door system. I’ll use Etrade for the custodial account (thank you for that post as well!). Ascensus for the plan doc. There is a detail I can’t seem to get clarity about and hope someone can answer it for me.
I’m a 56 year old, retired physician and have a part-time, self-employed job (S Corp) performing building inspections. I make ~$50-60k per year. It keeps me busy, social and I only have to tap ~$30-40k/year from my non-qualified savings. The Mega Back Door option seemed like a great way for me to convert some of my non-qualified savings to a ROTH account. In fact, that is the only reason I’m thinking about doing it!
Here is my question: are there income/compensation limitations constraints on after-tax contributions? For example, if my W2 compensation is $45000, can I still place $60k into the account? Am I limited to $45000 (my W2 income) or even less (W2 minus fed income tax)? Or, am I limited to 25% of my W2 plus my personal $24k?
Thanks, hope someone knows the answer. I spent ~2-3 hours last night reading IRS pubs, letter and various websites but couldn’t seem to find the definitive answer.
I don’t know for sure, but in general you can’t contribute more to a retirement account than you make, so no, I don’t think you can put $60K in there if you only got paid $45K.
Thanks very much for the response!
WCI: I have a defined benefit as well as a Individual 401K. I am looking to do the mega back door, but I am being told (from the people who might do the record keeping of the 401K plan I am setting up to enable this) that there maybe some limits across the DB and the 401K that might cause issues. Are you aware of anything in this area?
Yes. It all has to be looked at together by the actuary. If the actuary says you can’t do it, you can’t do it. That’s assuming the plan allows it of course.
I am looking into if my 403B allows this but do you think doing the mega back door Roth is better than just putting into a taxable account? I am trying to figure out where to put my biannual bonus which would be about 32K after tax.
Yes. It will generally come out ahead of a taxable account over the long term. Taxable vs never taxed again, your choice.
I’m a member of a large physician group and worked to get our Fidelity plan documents changed to hopefully allow those of us who desire to be able to do the Mega Back Door. We have a Profit sharing plan that funds 10% up to the IRS max of 27k per year on that (270k of income) and we have an elective 401k deferral which can be Traditional or Roth contributions up to 18k/24k max. The Profit Sharing plan does a 3% safe harbor contribution. There is no match.
The plan started allowing additional after tax contributions in July which for me would be an additional 9k per year to get to the 54k maximum I believe. We did not have an ability to do in service withdrawls prior to 59 1/2 or in plan conversions however. The plan is being amended to allow in plan conversions starting in Jan 2018.
My plan was to contribute the 9k with my December paycheck in 2017 and then do the conversion of those funds into the Roth 401k once the plan was set up for that in 2018. Reading thru the discussion I’m wondering if this will work.
1. I’m being told the after tax contributions will be subject to testing. I thought the safe harbor would make this possible but I’m being told because there is no match or safe harbor on the 401k side, only the profit sharing side, that we won’t pass testing.
2. If we get past hurdle number 1 above. I have 75% of my funds in the plan as pre-tax contributions and about 25% as after tax. Will I be able to specifically convert the after tax contributions without converting the pre tax?
What does the person changing the documents say in response to those questions?
As far as number 2, I think it depends on the plan document. What does it say?
Any update on if there exists an i401k that allows after tax contributions and in-service withdrawals? I need to set up an i401k for a landing spot for an old 401k (that isn’t my IRA so I can keep doing a BD Roth IRA) and figure if it can also allow a mega BD Roth IRA that would be outstanding. In your article, you said you aren’t aware of one, just wondering if there is an update in the past 3 years. (I am maxing out traditional retirement space above which I am investing in a taxable account, but would rather put it in a tax-free/Roth account 🙂
(My understanding is I could create a custom plan document that would allow the mega BD Roth IRA, but it would cost several grand. Would rather find a free i401k that already has this as part of the plan document.)
I think you can get that with a custom plan design. Talk to Konstantin Litovsky about it.
I do not know of an off-the-shelf i401(k) that will do that.
Per my 401K summary plan description I am able to make a one time withdrawal annually of after-tax contributions. My 401k is with Fidelity and my IRAs are with Vanguard. I was hoping to withdraw the after-tax funds and eventually place them into my Vanguard Roth IRA. However, I have been unable to withdraw the after-tax contributions (not including earnings) without having 20% federal tax included in the transaction. I can rollover to a Fidelity IRA with no taxes, only a small transaction fee. Is it normal to have to pay a federal tax on after-tax contributions for a withdrawal and not a rollover with the same company?
No. That’s bizarre. Why would you withhold 20% on a transaction with no taxes due?
I guess I was mistaken, the 20% federal tax is on my earnings which have to be withdrawn at the same time. I thought I could just withdraw the contributions alone. If I pay the tax on earnings and make the withdrawal, do I need to contribute the sum to my Vanguard traditional IRA and then rollover to my Vanguard Roth, the same way as the regular backdoor roth process?
You’re not being precise in the words you use, which makes it difficult to communicate. The 20% likely isn’t a tax, it is a withholding. Whether and how much tax you owe is something determined when you file your taxes. The 20% may be an overpayment or underpayment.
You aren’t withdrawing from a 401(k) and contributing to a traditional IRA and rolling over to a Roth IRA, you are transferring from a 401(k) to an IRA and converting to a Roth IRA. All these words have specific meanings and if you use them improperly, you may end up with bad information (and a big tax bill.)
Whether your 401(k) requires you to go through a traditional IRA or allows you to go straight to a Roth IRA or not, I don’t know. Read your plan document. The IRS allows you to go straight to a Roth IRA from a 401(k) though. It honestly doesn’t matter much either way.
Sorry for the confusing terms used, I think a lot of my confusion came from Fidelity calling it a rollover withdrawal. I eventually rolled my after tax contributions directly into my Vanguard Roth IRA. Per my plan, the $1400 in earning had to come along and those were rolled over into my Vanguard traditional IRA. Now I am wondering what to do with the $1400 sitting in my traditional IRA. I would like to move it somewhere to continue using the regular backdoor roth IRA and avoiding the pro rata rule. Can I roll that over to my Roth IRA and pay the taxes involved? I probably should have just done it all in one transaction but I think Fidelity was trying to help me avoid paying taxes on the earnings.
Yes, convert the $1400 to a Roth IRA and pay the taxes. You’ll be glad you did.
Me: I have 9-5 job where I contribute 18,500 to 401k and company contribution is like 2-3K. I also contribute alittle to Traditional IRA due to income limits. I have no Roth IRA
Wife: Sit home mom. She is not working and she contributes 5,500 to Traditional IRA. No Roth IRA
I have side business where the net income will be 60K this year. This is a sole prop and I am planning to file taxes as Qualified Joint venture (QJV) where me and my wife will be partners. The goal here is to maximize tax deferral savings so I will allocate say 80% to wife and 20% to me.
I am planning to open up a solo401k for her where she can contribute 18,500 plus 25% of 80% of net income. For simplicity purposes I am ignoring SE taxes for now. So this will be 18,500+ 12000 = 30,500
The max per calendar year that one can contribute to tax deferral accounts is 55K so what can we do with the difference between 55,000-30,500=24,500
1) If we design the solo401k properly, can we contribute $24,500 from unearned income like from personal savings account or should it be from earned income?
2) Either way, $24,500 should go towards solo401k Roth, right? Is what I am doing here Mega backdoor ROTH IRA?
1) Has to be earned income. It will also require a pretty special design. Most off the shelf i401(k)s don’t allow Mega Backdoor Roth options.
2) Only the “employee” contribution can go to Roth.
Be aware it works out to be 20% of her net income for the profit-sharing/employer portion of the contribution.
My employer allows us to do an in-plan Roth conversion, which I want to take advantage of. We are in Vanguard.
I currently already have a moderate amount of money in my employee After-Tax retirement account (after-tax contributions + accrued earnings), from before the in-plan Roth conversion was allowed. I need to transfer that money out of there in order to start doing doing the Mega Back Door Roth conversion essentially tax free with future paychecks, since I have already maxed out my $18.5K for 2018.
Would it be best to:
1) convert that money within my employer plan to my Roth 401K and pay the taxes (~$10K) on the accrued earnings so that I could keep the money wholly in my Roth 401K
Or
2) do an In-service Withdrawal Rollover to a Traditional IRA (earnings portion) and Roth IRA (contributions portion) and let it grow there? I currently already have a Traditional IRA of $0, to which I contribute and do the Regular Back Door Roth conversion every year.
I was going to do #1, when the Vanguard advisor mentioned option #2, so that I don’t have any additional tax burden. Is there some catch that I’m missing? Is there any good reason not to do #2? Does that affect any Regular Back Door Conversions in the future?
If it matters, I’m 44, and my husband is self employed and just starting to do very well. We will probably be at our lowest combined income this year, and may still be in a pretty high tax bracket at my retirement in 15 yrs.
Thanks for any advice!
The Vanguard advisor doesn’t understand your desire to do Backdoor Roth IRAs.
Probably the best option is # 3 if your 401(k) allows it, transfer out to a Roth IRA. If it doesn’t allow it, I’d go with # 1.
I am a resident and my wife works. We have maxed out our Roth IRA’s and her Roth 401K (I currently am not provided a 401K through my residency – which I am trying to change). I am now trying to figure out where to put any extra investment money and have narrowed it down to a taxable account vs the Mega Roth (we arent eligible for an HSA). I checked and her Fidelity 401K plan allows her to contribute up to 10% of her paychecks to her 401K post-tax (Non roth) up to $26,500 a year. I looked through her plan details and it states:
“Inservice withdrawals: Active colleagues, age 59 1/2 or older, may withdraw all or a portion of their account, for any reason, at any time. All or a portion of a colleague’s after-tax or rollover contributions may be withdrawn at any time.”
This sounds to me like she would be allowed to convert those after-tax (non roth) 401k contributions to a Roth IRA that we also have with Fidelity. Agree? Do you think that would be wiser than the taxable account?
Also, from what I understand it is ideal to convert that money into the Roth IRA as soon as possible to avoid generating any earnings in the 401K which would then be subject to income tax (not capital gains tax). So every 2 weeks I would call Fidelity and request a conversion? Seems like a fair amount of work but I would definitely do it if necessary.
This Mega Roth concept is new to me and almost seems too good to be true after thinking for so long that the yearly limit was 5500/person…
Yes.
Yes.
Yes. Or just do less frequent contributions/conversions. I mean, once a quarter wouldn’t be the end of the world would it?
I am talking with HR and TIAA to try to get the rules changed to allow a mega-backdoor Roth IRA according to the 4 rules you have spelled out. We have gone back and forth a bit but TIAA is unfamiliar with the the ideas and the 4 rules you have explained. I am trying to site IRS publications to back me up and I came across this…
https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans
This states you cannot just roll out after-tax contributions and leave pretax behind. That sounds like it is saying you would have to roll all or none, both after-tax AND pre-tax. Maybe I am reading it wrong. But if i am not, first, the employer (and even more the plan provider) would never go for it and second, rolling to to a traditional IRA would screw up your normal 5.5k BD Roth IRA.
Am I confused here. I am not finding any IRS publication back-up for after-tax contributions or the ability to then roll non-hardship in-service withdrawals of after-tax contributions. Can anyone help me find IRS publication on this?
Can you please elaborate on this? Why are these useful?
The plan should prohibit non-hardship in-service withdrawals of tax-deferred contributions (not mandatory, but a useful feature.)
The plan should allow for “lump sum” contributions (not mandatory, but useful.)
Not sure on the first other than to promote good behavior. The second just makes for more options to contribute.
Thank you WCI.
Re “Variation # 3 The Practice Owner’s Uniquely Structured 401K:” what if the practice owner has NO employee’s? So trully a solo 401k for just the individual practice owner. Would this variation now be legal/safer to attempt? Any downsides to it?
Also, any thoughts on a fair/current going rate for a custom solo 401k plan administration and documents that would allow all the components for a mega back door Roth? I was quoted about $1300 to start and draw up the plan (one time fee), and another $1200 per year for on-going compliance and administration. Does this seem reasonable?
The firm I use now charges $500 to set up and $125 a year. So yours does sound pricey.
What company do you use for this? I’d like to set something up. Thanks!
Mine is with mysolo401k.net right now in order to do a Mega BD Roth IRA.
WCI, thanks very much for the tip, I spoke with the mysolo401k.net people. As you alluded to, they charge significantly less for solo 401k plan documents (services?) than the TPAs (third-party administrators) that I have shopped around (for the purpose of a custom solo 401k plan allowing a mega-back doo Roth).
BUT, they were very upfront with the fact that they do NOT act as the plan’s TPA, they are simply the “401k plan provider.” They do “handle” the 1099R and 5500EZ filings and provide advice for various services and options, but and I understand that a true plan TPA would also provide some degree of reporting and liability protection in the event of an IRS/compliance issue?
I’m not sure if I understand the nuances and pros and cons (other than costs) of using a true TPA vs. simply a plan provider in this situation. Would appreciate any thoughts/info.
WCI, thanks very much for the tip, I spoke with the mysolo401k.net people. As you alluded to, they charge significantly less for solo 401k plan documents (services?) than the TPAs (third-party administrators) that I have shopped around (for the purpose of a custom solo 401k plan allowing a mega-back doo Roth).
BUT, they were very upfront with the fact that they do NOT act as the plan’s TPA, they are simply the “401k plan provider.” They do “handle” the 1099R and 5500EZ filings and provide advice for various services and options, but and I understand that a true plan TPA would also provide some degree of reporting and liability protection in the event of an IRS/compliance issue?
I’m not sure if I understand the nuances and pros and cons (other than costs) of using a true TPA vs. simply a plan provider in this situation. Would appreciate any thoughts/info.