Last Updated 12/20/2022
BACKGROUND & QUESTIONS
I need guidance on some of the mechanics of getting things moving money into and within my new self-directed 401k. Specifically:
- I have signed up with ADP after checking out other payroll companies. It seems that no one understands voluntary after tax contributions to a solo 401k. Their options are regular 401k (pretax) and Roth 401k. I cannot imagine I am the first customer to have this issue.
- Any guidance on how to set up this kind of contribution in payroll? I just want to make sure they go into the right places on the W2 for tax purposes.
- Is there a common workaround that people use?
ANSWERS:
Ultimately, it is simple as telling the payroll company to send the voluntary after-tax contribution to the specific voluntary after-tax subaccount of the self-directed 401k. Since this voluntary after-tax contributions will not need to be reported on the W-2 (it’s optional report voluntary after-tax contributions), the payroll company does not need to track it for W-2 reporting purposes. If the payroll company cannot accommodate this, you can simply send the money directly to the voluntary after-tax subaccount.
Mechanics of Making Contributions based on W-2
First, it is clear that both the employee and employer contributions don’t need to be made until the business tax return deadline including any timely filed extensions (e.g. see the chart on page 3 of IRS Publication 560).
Second, if you want to report the employee contributions on your w-2 you can take the following steps: (i) tell the payroll company what you will contribute so that payroll company can report on w-2 (e.g., per the w-2 instructions pre-tax elective deferrals are not included in Box 1 of the w-2 and are listed in Box 12 and the “Retirement Plan” field is checked in Box 13) & (ii) “park” the money (e.g. in personal acct) and then make sure that you open solo 401k bank or brokerage account & deposit the contributions by the business tax return deadline including any timely filed extension.
- Our plan allows you to make voluntary after-tax
contributions. - Please see below information regarding limits and mechanics of making contributions.
- Please also see the following link: § Mega Back Door Roth
- Please let us know when you make voluntary after-tax
contributions and convert to the Roth 401k sub-account so that we capture the information needed for 1099-R reporting.
- 2022 After-Tax Contribution
Limit: Lesser of (1) 100% of compensation or (2) the overall limit that applies the year for which the contribution is made (e.g. $61K for 2022)) LESS any other Solo 401k contributions (e.g. elective deferrals (either roth or pre-tax) OR profit sharing) - If the entity type is a Sole Proprietor (or a single-member LLC taxed as disregarded entity), self-employment compensation is equal to line 31 of Schedule C LESS deducting one-half of self-employment tax.
- If the entity type is an S–Corporation, it is equal to W-2 income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
How do I make the voluntary after-tax contributions?
- To make the contribution, you will make the check payable in the name of the solo 401k and write “Annual Contribution” on the memo section of the check.
- Deposit the amount of the voluntary after-tax contributions that you elect to make in the separate voluntary after-tax sub-account.
- You will then transfer the funds to the Roth sub-account for the Solo 401k(or Roth IRA). Please let us know right away when you do so that we can send you the applicable forms to capture the information that we need to handle the required 1099-r (which we will do as part of our services for no additional charge).
Where do I report the voluntary after-tax contributions?
- For self-employment income reported on a w-2, you may (but are not required to) report voluntary after-tax contributions in Box 14 of the w-2.
- For all others, there is no place to report voluntary after-tax contributions.
Where do I report the conversion of funds form the voluntary after-tax subaccount to the Roth sub-account?
- A Form 1099-R is used to report the conversion to the IRS.
- On Form 1040, report the amount converted in Line 4a and “0” in Line 4b unless there is a taxable gain. Enter the word “Rollover” next to line 4b.
- A taxable gain would result if the funds in the after-tax account accrued a gain after being contributed to such account in which case the amount of such gain is a taxable and needs to be listed on Line 16b.
