Do I have Make Pretax Solo 401k Contributions If I Make Roth or Voluntary After Tax Contributions

BACKGROUND:

I recently found your website and would like to compliment you on the wealth of information that you share there. I currently have a solo 401k at a competitive company with a plan that provides for after tax contributions and in-service distributions. But I am interested in moving the plan to your firm as the plan provider in 2019. As I study my options for the future, I wondered if you could please clarify one point for me.  Assuming that a person is self-employed with $100k+ of net self-employed income, if that person makes a maximum Roth 401(k) salary deferral contribution ($19,000 for 2019), is it necessary (or advisable) to also make some sort of tax-deductible 401(k) profit sharing contributions (up to 20% of net SE income) before taking advantage of the After Tax contribution component and the subsequent backdoor roll to a Roth IRA?  Or can the person just skip the tax-deductible profit sharing contribution, and go straight to maxing out the 415 limit ($56,000 for 2019)?  In other words, can this person make a $19,000 Roth Solo 401k deferral and then make a $37,000 After Tax Contribution, which is then immediately rolled into a Roth IRA?  Would doing this raise any red flags with regulators or be frowned upon?  Does it “look” better to make some sort of tax-deductible profit sharing contribution?

Thanks in advance for your advice.  I hope to be able to do business with your company in the near future!

ANSWER:

There is no requirement to make a profit sharing contribution and doing what you describe is acceptable, as the solo 401k regulations do not require the participant to make one type of contribution in order to make a different type. However, the solo 401k participant can not make annual contributions of any type (i.e., pretax, voluntary after-tax or roth) in years with no self-employment income from the business that sponsors/adopted the solo 401k plan.

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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