QUESTION:
I want to establish my own solo 401k, ideally with TD Ameritrade as the custodian, and while researching the subject I found your site and something I was not aware of; the Mega Back Door Roth Solo 401k.
I have read the material on your website and watched the video. I am a CFP. I still do not understand this feature and how it may or may not enable me to increase my after tax contributions in excess of $19,500 for 2020.
I am a sole proprietor, age 60, and file a schedule C.
Please assume net income (line 31 Schedule C) of $90k for 2020.
Can I contribute MORE than $19,5000 in after tax funds to the solo 401k?
Please show me how I could maximize my annual contributions as well as my Roth contributions.
I get the impression this new after tax feature may allow me to contribute more than $19,500 to the Roth portion of the plan.
ANSWER:
Just like Roth 401k and voluntary after-tax contributions can be made to a full-time employer 401k (provided the plan document allows for it), the same is true for a solo 401k plan.
In order to take advantage of the back door solo 401k after-tax conversion, the following applies:
- The plan must allow for voluntary after-tax contributions.
- The voluntary after-tax contributions are required to be tracked in a separate holding account (bank or brokerage account) under the solo 401k plan.
- The plan must allow for in-plan conversions if the voluntary after-tax funds will be converted to the Roth solo 401k designated account.
- The plan must allow for in-service distributions if the voluntary after-tax funds will be converted to a Roth IRA.
- The conversion must be documented and a Form 1099-R must be issued to report the conversion whether to a Roth IRA or to the Roth solo 401k designated account.
A solo 401k plan from My Solo 401k Financial allows for all of the above, and we will also perform the required Form 1099-R reporting.
Lastly, based on the $90,000 of net-self-employment described in your question above, you can contribute the following to the solo 401k plan for 2020:
Roth solo 401k contribution = $26,000 ($19,500 employee contribution plus $6,500 catch-up amount since you are age 50 or older)
Voluntary after-tax solo 401k contribution = $37,500 (derived by taking the overall limit of $63,500 – $26,000)
