Can I Use a Basic Fidelity or Charles Schwab Solo 401k For a Mega Backdoor Roth?
Watch: Why basic brokerage Solo 401k plans block the Mega Backdoor Roth — and how to fix it
It’s one of the most common questions we hear: I already have a Solo 401k at Fidelity or Charles Schwab — can I use it to do a Mega Backdoor Roth? The short answer is no. The basic, off-the-shelf Solo 401k plans offered by discount brokerages use vanilla prototype documents that simply don’t permit the steps a Mega Backdoor Roth requires. The good news: you don’t have to give up your Fidelity or Schwab accounts to unlock the strategy. You just need the right plan documents.
Below we break down exactly why the basic brokerage plans fall short, what eligibility looks like, how the Mega Backdoor Roth actually works, and how a custom Solo 401k from My Solo 401k Financial unlocks it.
First Things First: Are You Eligible for a Solo 401k?
Before the Mega Backdoor Roth even enters the picture, you have to qualify for a Solo 401k in the first place. There are two parts to the eligibility equation.
1. You must have self-employment income
You need to be reporting earned self-employment income on your taxes. That can come from any of the following sources:
- A Schedule C, if your business is taxed as a sole proprietorship
- W-2 wages, if your business is taxed as an S-corp or C-corp
- Income reported on line 14 of a K-1 received from a business taxed as a partnership
You can also have multiple streams of self-employment income and still qualify.
2. No non-owner, non-spouse, full-time W-2 employees
The Solo 401k is for an owner-only business. You can be a W-2 employee, and your spouse can be a W-2 employee, but there cannot be other full-time W-2 employees working for any business owned by either owner.
A full-time employee is someone 21 years or older working at least 1,000 hours per year (with a year of service), or 500 hours per year for two consecutive years.
Why a Basic Fidelity or Schwab Solo 401k Can’t Do a Mega Backdoor Roth
Here’s the heart of the matter: what you can do with a Solo 401k is dictated entirely by the plan documents. Off-the-shelf plans use vanilla prototype documents, and those Fidelity and Schwab basic documents:
- Do not allow for voluntary after-tax contributions
- Do not allow in-service transfers of voluntary after-tax funds to a Roth Solo 401k or, within the plan, to a Roth IRA
In other words, the basic brokerage documents do not allow the steps required to make a Mega Backdoor Roth Solo 401k contribution.
We don’t hold your money
Unlike some providers, My Solo 401k Financial does not hold your money or offer accounts we have access to. Customers obtain the Solo 401k plan documents from us and then open accounts at the bank or brokerage of choice — with Fidelity and Schwab being the top two options. We’re very hands-on in helping customers open those accounts.
Already Have a Solo 401k at Fidelity or Schwab? You’re Not Stuck
If you already have a basic Solo 401k at Fidelity or Schwab and just discovered you can’t make Mega Backdoor Roth contributions, you’re not stuck forever. You simply need to upgrade your documents through a process called a restatement.
Think of it as a cut-and-paste: you cut out the basic plan documents provided by your discount brokerage and replace them with advanced Solo 401k plan documents from My Solo 401k Financial that do allow you to do what you want.
From the brokerage’s perspective, your existing accounts are governed by their plan documents. They do open accounts for people who bring their own plan documents — you just open the new account type. Fidelity refers to these as non-prototype accounts (also called investment-only accounts), and Schwab opens Company Retirement Accounts (CRA) so that the brokerage understands your Solo 401k is now governed by third-party plan documents.
How the Mega Backdoor Roth Solo 401k Actually Works
Once you have plan documents that permit it, the Mega Backdoor Roth is a two-step process.
Step 1: Make a voluntary after-tax contribution
You contribute after-tax dollars to the voluntary after-tax account within your Solo 401k. This step does not need to be reported on a 1099-R.
Step 2: Move the dollars to a Roth account
You then convert those after-tax dollars to a Roth Solo 401k or a Roth IRA, where they have the potential for tax-free growth. Most folks convert immediately so they can start investing right away.
Step 2 (moving the dollars to the Roth account) must be reported on a 1099-R. At My Solo 401k Financial we prepare it for our customers at no additional charge — you or your advisor simply submit a form on our website with the information we need.
Basic Brokerage Solo 401k vs. Custom Solo 401k: Side by Side
Bonus: $1,500 in SECURE Act Tax Credits
Beyond the Mega Backdoor Roth, a custom Solo 401k from My Solo 401k Financial enables the solopreneur to claim $1,500 in tax credits under the SECURE Act — $500 per year for three consecutive years. That more than covers our fees for the first seven years.
Another Perk: Participant Loans
Basic brokerage Solo 401k documents don’t allow loans. Our plan documents do. You can borrow up to 50% of the value of your Solo 401k, not to exceed $50,000, with no taxes or penalties as long as it’s properly documented as a loan — and we prepare the required loan documents at no additional charge.
Repaid in equal monthly or quarterly payments of principal and interest, at a rate of either prime plus 1% or a CD rate plus 2%, spread over a five-year term.
Ready to Unlock the Mega Backdoor Roth With Your Solo 401k?
Keep your investments at Fidelity, Schwab, or the brokerage of your choice — and add the power of voluntary after-tax contributions, in-service Roth conversions, participant loans, and alternative investments. My Solo 401k Financial can set up the right Solo 401k structure or restate your existing plan.
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