The Mega Back Door Roth Using a Solo 401k Plan

Mega Back Door Roth

After-Tax Money in Employer Solo 401k Plans

The ability for a plan participant to make after tax contributions is largely up to the solo 401k plan provider. Although a solo 401k plan can allow for after-tax contributions, the solo 401k plan provider is not required to provide a retirement plan document that allows for it. Indeed many plans don’t offer this option.


While not all solo 401k plans allow for after-tax contributions, My Solo 401k Financial offers a solo 401k plan document that allows for aft-tax contributions.

One benefit of after-tax contributions is that the salary deferral limits that apply to other participant contributions do not necessarily apply to after-tax contributions. In 2017, the combined salary deferral limit for pre-tax and Roth salary deferrals to Solo 401(k) plans is $18,000. If solo 401k participants are 50 or older by the end of the year, then they can contribute an additional $6,000, for a total of $24,000. If, however, they are eligible to make after-tax contributions to a solo 401k plan, those contributions are not subject to these limits. In addition to the $18,000/$24,000 limit on salary deferrals (also known as employee contributions), there is a lesser known rule called the “overall limit.” The overall limit for 401(k) plans including solo 401k plans for 2017 is $54,000, or 100% of compensation, whichever is less. The overall limit looks at the total annual additions to all of a participant’s accounts in plans maintained by one employer, and includes not just their salary deferrals, but also matching contributions, allocations of forfeitures and other amounts.

If a solo 401k provider’s plan document allows for after-tax contributions, then-from a tax code perspective-the self-employed individuals can make such contributions up to their overall limit for the year.

Example 1:

Liz works for an employer that sponsors a full-time employer 401(k) plan that allows her to make after-tax contributions. She plans on making a full $18,000 deferral to her Roth 401(k) and expects to receive, between matching and profit-sharing contributions, another $10,000 in employer contributions. That would give Liz a total of $28,000 of additions to her plan for 2017. As such, assuming Liz has enough compensation to do so, she can contribute an additional $26,000 in after tax funds to her plan ($54,000 overall limit – $28,000 of other deductions) for 2017.

Example 2:

Let’s assume the same as example 1 above except that Liz is also self-employed on the side and thus opens a solo 401k plan that allows for after-tax contributions. Therefore, Liz is participating in two separate plans (the full-time employer 401k and her own solo 401k plan sponsored by her self-employed business). Therefore, using the same numbers as example 1 above, Liz can make the $26,000 after-tax contribution to her Solo 401k plan provided, of course, she has enough earned income from her self-employed business to make the after-tax contribution.

How can I get more money into my Solo 401k from my full-time employer 401k, 403b or 457b?

In addition to having different rules than pre-tax and Roth salary deferrals on their way in to a plan, after tax contributions also have different rules for how they may come out the plan. The plan distribution rules are complicated but, for the most part, if a 401k, 403b or 457b participant is still working for the company sponsoring their plan and they are under 59 ½, access to their pre-tax salary deferrals, Roth salary deferrals and their earnings is largely limited. However, once a participant leaves their job or turns 59 ½, that changes.

Great News, However

The same restrictions, however, do not apply to after tax contributions and their earnings, provided that they are maintained by a plan in a separate account. These funds may be fairly accessible, depending on a plan’s rules, even if a client is under 59 ½ and still working for the company offering their 401k, 403b or 457b. If their plan allows, they may be able to take a distribution of these funds at any time via “in-service distributions.” Being able to take-out the after-tax distributions from the plan opens the door to the following strategy.

The “Mega Back Door Roth Solo 401k”

The ability for a full-time employer plan participant to take a distribution of their after-tax contributions, including earnings, even before they reach age 59 1/2, opens the door to a strategy dubbed by some as the “mega back-door Roth Solo 401k.” In order for a client to take advantage of the mega-back-door Solo 401k Roth strategy, the following conditions must be present:

  • The business owner’s solo 401k plan must allow them to make after-tax contributions.
  • The business owner must have enough earned income from self-employment to make the after-tax contributions to their solo 401kplan.
  • The Solo 401k plan must allow for in-plan Roth Solo 401k conversions.

Thanks to ATRA (the American Taxpayer Relief Act of 2012), which liberalized the conditions for executing in-plan Roth Solo 401k conversions, solo 401k participants can process in-plan conversions of all solo 401k funds. Before ATRA, in-plan Roth Solo 401k conversion were available to solo 401k participants only when a participant had satisfied a statutory or regulatory distribution trigger and as permitted by the solo 401k plan. For example, solo 401k plan deferrals generally are unavailable for distribution before a participant reaches age 59½. As a result, only at age 59½ or later could an in-plan Roth Solo 401k conversion of elective deferrals take place. ATRA changes this and permits an in-plan Roth Solo 401k conversion without the requirement that a participant have a statutory or regulatory distribution trigger if the plan language permits. So now, a solo 401k plan could permit participants under age 59½ to conduct an in-plan Roth Solo 401k conversion of deferrals.

As a result, a solo 401k participant can make after-tax contributions to their solo 401k plan on an ongoing basis. Subsequently, from a tax planning perspective, before there are large gains on those amounts, they can process an in-plan Roth solo 401k conversion of those funds and deposit the funds in the Solo 401k Roth designated account. Therefore, the converted funds will be all or mostly after-tax money, and the conversion will be virtually tax-free.


Just want to clarify that the 1099-R will denote conversion of solo 401k after-tax funds to either a Roth IRA or a Roth solo 401k as a nontaxable amount – right?


Correct as long as the basis is converted right away. If earning accumulate while in the after tax account, those will be subject to taxes.


Also do I need to convert the after-tax funds each time a deposit is made to the After-tax solo 4o1k checking account or do I wait and do it once in December for the total amount for the year?


It is best to convert the after-tax funds to the Roth IRA or Roth Solo 401k as soon as a contribution is made; otherwise, the gains on the after-tax account will be subject to taxes when converted.

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