Please check out this good question from our Daily Live Zoom call. Subscribe to our YouTube Channel to get notifications of our Daily FAQs.
Solopreneur Roth 401k Question:
I am a solopreneur with my own Solo 401k plan that allows for Roth Solo 401k contributions. Do you have to report your Roth Solo 401k contributions on your W-2? If so, on what line of the Form W-2 are the contributions reported?
Response:
Great question as one of the top reasons that self-employed individuals open Solo 401k plans with us is the ability to make Roth Solo 401k, and even Mega Backdoor Roth, contributions!
For a self-employed person whose business is taxed as an S-corporation, the ability to make Solo 401k contributions is based on different factors including age, self-employment compensation (i.e. w-2 wages from the self-employed business taxed as an S-corp), etc.
If such a person has a Solo 401k like our plan that allows employee (elective deferrals) Solo 401k contributions to be made as Roth Solo 401k contributions, such contributions are reported, per the w-2 instructions, in Box 12 of the w-2 (Code AA) and check “Retirement Plan” field in Box 13.
While the Secure Act 2.0 does allow for employer contributions to be made as Roth Solo 401k contributions, for a plan like our Solo 401k plan that allows for Mega Backdoor Roth Solo 401k contributions there is no substantive advantage to making Employer (Nonelective) Solo 401k contributions as Roth Solo 401k contributions:
- Voluntary After-tax Solo 401k Contributions can be made at a higher percentage of self-employment income (i.e., 100% of self-employment compensation subject to the overall limit) compared to Employer (Nonelective) Contributions made as Roth Solo 401k contributions (e.g. 25% of w-2 wages for a self-employed business taxed as an S-corp, etc.).
- The deadline to establish a Solo 401k plan in order to make both Employer (Nonelective) and Voluntary After-Tax Contributions is the same: the plan must simply be established in time to make contributions by the business tax return deadline including any timely filed extension.
- Voluntary after-tax contributions may be transferred to a Roth IRA whereas Employer Contributions may not be transferred out of the Solo 401k to a Roth IRA until a “triggering event” has been met (e.g. the attainment of age 59 ½).
