While Fidelity Investments does not offer a solo 401k that allows for voluntary after-tax contributions, which is the first step in implementing the “mega back door Roth solo 401k strategy, “Fidelity does offer a custodial brokerage account to hold the voluntary after-tax solo 401k funds for a solo 401k plan provided by a solo 401k provider such as My Solo 401k Financial.
When you open a solo 401k plan with My Solo 401k Financial, we not only provide an IRS approved plan document that allows for voluntary after-tax contributions but it allows for in-service distributions of the voluntary after-tax funds which is the second piece of the mega backdoor strategy.
We also fill out all of the applicable Fidelity Investment brokerage forms in order to open the correct voluntary after-tax brokerage account for the solo 401k.
Following are some of the rules regarding this type of solo 401k voluntary after-tax setup for implementing the mega back door Roth solo 401k strategy:
- Voluntary after-tax solo 401k contributions fall under the employee (salary deferral) contribution umbrella.
- This type of contribution is not considered employer (profit sharing) contributions, so the contribution is not tax deductible because it is considered made with post-tax dollars.
- When voluntary after-tax solo 401k contributions are converted to a Roth IRA or the Roth Solo 401k, the conversion has to be documented in writing by completing a conversion Form ( the IRS will expect to see a copy of this form upon request), and a Form 1099-R has to be issued to report the conversion whether taxable or not. This reporting is covered by our annual service and fee.
- Voluntary after-tax solo 401k contributions can be distributed and thus converted at any time. This is why the conversion of voluntary after-tax solo 401k contributions has been dubbed the “mega-backdoor Roth solo 401k.”
- There is a lesser known rule called the “overall 415 limits.” The overall 415 limit for 401(k) plans including solo 401k plans. For 2018, the overall limit is $55,000. 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. Voluntary after-tax solo 401k contributions are subject to the overall annual limit (“The 415 Limit) $55,000 for 2018.
Lastly, don’t confuse Roth solo 401k contributions with voluntary after-tax contributions. VISIT HERE to learn more about the differences.