Non-Roth after-tax contribution to a Solo 401k

I have been hearing more and more about non-Roth after-tax contributions as a way to max out Solo 401K contributions. I’m wondering if you have an answer to my lingering questions:

QUESTION 1)

If I make a non-Roth after-tax contribution to my Solo 401-K, can I then immediately make an intra-plan Roth conversion of those funds? (Assume my plan allows it)

 

ANSWER to Q1.

Yes just the after-tax solo 401k contributions can be converted (in-plan conversion) to a Roth solo 401k provided the following items are satisfied.

 

  1. i) The after-tax solo 401k contributions are made into a separate holding account not commingled with the pretax solo 401k contributions, and) ii) the plan allows for in-plan Roth solo 401k conversions.

Lastly, it is best to convert the aft-tax solo 401k funds immediately otherwise the earnings will need to be included in the conversion which will be subject to taxes.

QUESTION 2)

What is the lowest salary I can pay myself (S-corp) and still make the maximum 53K annual 401(k) contribution for 2015? Can I pay myself 53K in salary, make an 18K employee contribution, 13.25K employer contribution (53*.25 = 13.25) and the rest (21.75k) in an employee non-Roth after tax contribution?

ANSWER to Q2.

It is important to understand that the after tax solo 401k contribution are part of the overall limit. The overall limit for solo 401k plans including solo 401k plans for 2015 is $53,000, or 100% of compensation, whichever is less.

After-tax solo 401k contributions are based on net-income, so because your self-employment entity type is an S-corp, you will need at least $53,000 of w-2 income from self-employment to do the following.

  1. Treat $18,000 as your pretax contribution
  2. Treat the remaining $35,000 as your after-tax solo 401k contribution (make sure it is deposited in its own separate bank account and don’t commingle the funds with your pretax contributions) which you can then turn around and convert to a Roth solo 401k.

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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