Every RIA at Schwab Should Know This Solo 401(k) Trick (Hint: $70,000 Mega Backdoor Roth!)

Watch: How Schwab RIAs can unlock the $70,000 Mega Backdoor Roth strategy for self-employed clients

Introduction: The $70,000 Opportunity You’re Missing

What if your clients could legally move up to $70,000 a year into a Roth account — even if they’re over the income limit? This isn’t a loophole; it’s a legitimate tax strategy that many Schwab-custodied RIAs overlook.

The Mega Backdoor Roth is one of the most powerful Solo 401(k) strategies available today. By pairing Schwab brokerage accounts with custom plan documents from My Solo 401k Financial, advisors can unlock advanced Roth funding opportunities for their self-employed clients.

Solo 401(k) Eligibility: Who Qualifies in 2025?

Before diving into the Mega Backdoor Roth strategy, it’s essential to understand who qualifies for a Solo 401(k) in 2025:

✓ Eligibility Requirements:

Must have self-employment income (1099, LLC, S-Corp, sole proprietorship, etc.)
No full-time employees other than the owner or spouse
Both spouses may participate if earning income from the same business
Can be combined with W-2 income from another employer

Ideal Clients for Solo 401(k) Plans

The Solo 401(k) is particularly beneficial for:

Client Type	Why They Benefit
Consultants	High income with flexible business structure
Realtors	Variable income with 1099 status
Freelancers	Self-directed retirement planning
Small Business Owners	Maximum contribution limits and tax benefits
Side Hustlers	Additional retirement savings beyond employer 401(k)

💡 Why This Matters for Schwab RIAs

By offering Solo 401(k) solutions, RIAs can expand their Assets Under Management (AUM) by capturing client retirement assets that would otherwise remain stuck in IRAs or outside your management purview. This strategy positions your firm as a comprehensive retirement optimizer, not just an investment manager.

The $70,000 Mega Backdoor Roth Explained

What Is the Mega Backdoor Roth?

The Mega Backdoor Roth is a strategy that allows individuals to make after-tax contributions to their Solo 401(k) and then convert those contributions to Roth — either through an in-plan Roth conversion within the Solo 401(k) or by rolling them over to a Roth IRA.

📊 Example: Breaking Down the $70,000

A self-employed individual earning $150,000 in 2025 could potentially contribute:

$0 in employee elective deferrals (pre-tax or Roth)
$0 in employer profit-sharing contributions (25% of compensation)
$70,000 in after-tax contributions
Total: $70,000

The after-tax portion can then be converted to Roth for tax-free growth potential!

Why the Mega Backdoor Roth Is So Powerful

Feature	Traditional Roth IRA	Mega Backdoor Roth
Annual Contribution Limit	$7,000 ($8,000 if 50+)	Up to $70,000+
Income Restrictions	Yes (phase-out begins at $150,000 for single filers for 2025)	None
Tax Treatment	After-tax contributions, tax-free growth potential	After-tax contributions converted to Roth, tax-free growth potential
Flexibility	Limited contribution space	Massive contribution capacity for high earners

Key Requirements for Mega Backdoor Roth

To execute the Mega Backdoor Roth strategy, your client’s Solo 401(k) plan must specifically allow:

After-tax contributions (separate from pre-tax and Roth employee deferrals)
In-plan Roth conversions or distributions that can be rolled to a Roth IRA

⚠️ Critical Point: Not all Solo 401(k) plans include these features by default. This is where the choice of plan provider becomes crucial.

Why Schwab’s Standard Prototype Isn’t Enough

The Charles Schwab standard Solo 401(k) prototype plan has significant limitations when it comes to advanced retirement strategies.

The Limitation: Missing Features

Feature	Schwab Prototype Plan	My Solo 401k Financial Plan
After-tax Contributions	❌ No	✅ Yes
In-plan Roth Conversions	❌ No	✅ Yes
Mega Backdoor Roth Capability	❌ No	✅ Yes
Participant Loan Provisions	❌ No	✅ Yes
Eligible for $1500 Solo 401k Tax Credits	❌ No	✅ Yes

The Solution: Best of Both Worlds

The good news? You don’t have to abandon Schwab to access the Mega Backdoor Roth. The solution is to:

Use Schwab as the custodian for the investment accounts (brokerage, money market, etc.)
Adopt a third-party plan document from My Solo 401k Financial that includes after-tax contribution and in-plan Roth conversion features

Result: Your clients enjoy the same trusted Schwab custody experience they’re familiar with, plus the tax flexibility needed to execute the Mega Backdoor Roth strategy.

💡 Key Insight for RIAs

Many advisors mistakenly believe that using Schwab as a custodian means they must use Schwab’s prototype plan. This isn’t true! Custodianship and plan design are separate functions. You can custody assets at Schwab while using a more robust plan document from a specialist provider.

Step-by-Step Implementation for RIAs and Their Clients

Here’s exactly how to set up a Mega Backdoor Roth-capable Solo 401(k) for your clients at Schwab:

Step 1: Verify Eligibility

Confirm that your client:

Has self-employment income from a business, consulting, or side hustle
Does not have any full-time employees (other than a spouse who also earns from the business)
Wants to maximize retirement contributions beyond traditional limits

Step 2: Select the Right Plan Provider

Choose a Solo 401k plan provider (such as My Solo 401k Financial) that explicitly supports:

After-tax contributions
In-plan Roth conversions

Recommended: My Solo 401k Financial specializes in customized Solo 401(k) plans with these advanced features and can work seamlessly with Schwab custody.

Step 3: Open Accounts at Schwab

Once the plan is established:

The plan provider (such as My Solo 401k Financial) will obtain an EIN (Employer Identification Number) for the plan
Open the Solo 401(k) brokerage account at Schwab under the plan’s EIN
Set up separate sub-accounts for pre-tax, Roth, and after-tax contributions if needed

💡 Pro Tip

Work with My Solo 401k Financial to handle the administrative setup, including obtaining the EIN and drafting the plan documents. They’ll coordinate with you and Schwab to ensure everything is properly established.

Step 4: Make Contributions

Your client can now make three types of contributions:

Contribution Type	2025 Limit	Notes
Employee Elective Deferral	$23,500 ($31,000 if 50+ OR $34,750 if 60-63)	Can be pre-tax or Roth
Employer Profit-Sharing	Up to 20% or 25% of compensation (depending on how business is taxed)	Pre-tax contribution
After-tax Contributions	Up to $70,000 total annual limit (includes all sources)	This is the Mega Backdoor Roth source

Step 5: Convert After-Tax to Roth

This is the critical step for the Mega Backdoor Roth strategy:

Two Conversion Options:

In-plan Roth conversion: Convert after-tax contributions to the Roth portion of the Solo 401(k) while keeping funds in the plan
Rollover to Roth IRA: Distribute after-tax contributions and roll them into a personal Roth IRA

Best Practice: Convert after-tax contributions to Roth as soon as possible after making them to minimize any earnings that would be taxable upon conversion.

⚠️ Tax Consideration: Only the earnings on after-tax contributions are taxable when converted to Roth. The principal (the after-tax contribution itself) is not taxed again. This is why prompt conversion is recommended.

Step 6: Report Properly

Proper tax reporting is essential:

Form 1099-R: Must be issued for any in-plan Roth conversions or distributions
Form 5500-EZ: Required if plan assets exceed $250,000 at year-end (including value of Solo 401k sub-accounts and assets as well as the value of any defined benefit plan (if any))
Contribution tracking: Maintain detailed records of all contribution types and conversions
Coordinate with tax preparer: Ensure your client’s CPA understands the Mega Backdoor Roth strategy

Step 7: Bonus – Claim Tax Credits

Don’t overlook the Solo 401k Tax Credits:

💰 Available Tax Credits:

Small businesses can claim up to $1,500 in tax credits ($500 per year for 3 years) for setting up a plan Solo 401(k) that includes the auto-enrollment feature
The Solo 401k participant can opt out of the default 3% contribution percentage and still be eligible to claim the credits

Key Compliance Considerations

When implementing the Mega Backdoor Roth strategy, staying compliant with IRS regulations is crucial:

Compliance Item	Requirement
Plan Document Review	Verify plan explicitly permits after-tax contributions and Roth conversions
Timing of Conversions	Convert after-tax to Roth promptly to minimize taxable earnings
Form 1099-R	Issue for all in-plan conversions and distributions
Form 5500-EZ	File annually if plan assets exceed $250,000 as of December 31 including value of sub-accounts and assets as well as the value of any defined benefit plan (if any)
Contribution Limits	Total contributions cannot exceed $70,000 ($77,500 if 50+ OR $81,250 if 60-63)
Record Keeping	Maintain detailed records of all contributions, conversions, and distributions for IRS audit readiness

📞 Ready to Offer the Mega Backdoor Roth to Your Clients?

Whether you’re setting up your first Solo 401(k) with Mega Backdoor Roth capability or reviewing your existing plan structure, My Solo 401k Financial can help.

Get Started: Open Account

⚠️ Important Reminder: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before implementing any retirement or investment strategy with your clients’ funds.