For those with IRAs that contain both pretax and non-deductible IRA contributions, and are planning to just convert the after-tax IRA (non-deductible IRA fund) to a Roth IRA, a solo 401k plan may be a good way to isolate the pretax IRA funds so that just non-deductible IRA funds can be subsequently converted to a Roth IRA.
Only pre-tax IRA funds can transferred to company plans such as a solo 401k. By transferring the pre-tax IRA funds to a solo 401k plan, you will be able to take full advantage of the backdoor Roth IRA strategy. Once you transfer the pretax IRA funds to the pretax solo 401k bucket, the remaining basis in the IRA can be converted to a Roth IRA tax free.
John is self-employed and opens a solo 401k plan for his self-employed business. He has $20,000 in a traditional IRA of which $5,000 consist of non-deductible IRA contributions. John transfers $15,000 of the IRA funds to a solo 401k plan. Therefore, he has isolated the $5,000 of non-deductible (after-tax) IRA funds which he then converts to a Roth IRA. Because the $5,000 is considered after-tax IRA funds, he does not owe any taxes on the Roth IRA conversion.