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Are there Solo 401k investment restrictions on Mega Backdoor Roth Solo 401k funds?
QUESTION:
Is there any restriction on investment type for the different Mega Backdoor Roth Solo 401k buckets (e.g., Pre-tax, Roth, and/or Voluntary After-tax)?
RESPONSE:
While there is no restriction it is important to keep in mind that when one is making Mega Backdoor Roth Solo 401k contributions, one is not simply making Roth Solo 401k contributions but is making voluntary after-tax Solo 401k contributions.
Voluntary after-tax solo 401k contributions are a different type of Solo 401k contribution from Roth Solo 401k contributions (employee/salary deferrals).
The contribution limit is higher for voluntary after-tax Solo 401k contributions than Roth Solo 401k contributions. For example, for 2023 one is able to contribute 100% of self-employment compensation as a Roth Solo 401k not to exceed $22,500 (or $30,000 if 50 or older) provided that no contributions are made to another plan (e.g. “day job” 401k). For 2023, the voluntary after-tax contribution limit is 100% of self-employment compensation not to exceed the overall limit (e.g. $66,000 for 2023 but reduced by any other contributions made to the Solo 401k other than catch-up contributions).
Voluntary after-tax Solo 401k contributions must be deposited in a separate sub-account such that for a Mega Backdoor Roth Solo 401k one will have 3 different sub-accounts (i.e. Pre-tax, Roth, and Voluntary After-tax).
When one makes Mega Backdoor Roth Solo 401k contributions, one first deposits the voluntary after-tax Solo 401k contributions into a separate voluntary after-tax solo 401k sub-account and then transfers the funds from the voluntary after-tax solo 401k sub-account to a Roth Solo 401k sub-account.
If one waits to make investments until after the funds clear into the Roth Solo 401k sub-account is that the subsequent gains are tax-deferred (and tax-free if one is later able to make a qualified Roth Solo 401k distribution). Whereas if the funds were invested while in the voluntary after-tax Solo 401k sub-account the gains would be taxable.
