Author Topic: Anyone Execute a mega backdoor roth in solo 401k ?  (Read 2886 times)

DavidAnnArbor

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Anyone Execute a mega backdoor roth in solo 401k ?
« on: June 22, 2017, 12:13:44 AM »
I understand that the solo 401k plan documents for Vanguard, Fidelity, and others don't allow for the steps needed to undertake a mega backdoor roth
  • non-deductible employee contributions to the 401k plan
  • in-service distributions for non hardship reasons into a roth

Has anyone tried the method of Harry Sit who used the prototype plan of Ascensus to administer his own solo 401k plan ?  This prototype enables him to do the above so that he can execute the mega backdoor roth.

https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html#comment-21097

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #1 on: June 23, 2017, 09:00:22 AM »
I've done it. My business's solo 401k is through MySolo401K.net. Annoying business name but Mark Nolan, the guy who runs it, has been super helpful answering all of my questions. The process is basically the same as Harry's post except it's a bit cheaper.

All of my 401K accounts are at Fidelity, so I opened a new Fidelity Investment Only account and nicknamed it "After-tax" with an initial deposit. I also opened a new Fidelity Roth IRA. After the initial deposit cleared I sent in the withdrawal form and told them to transfer the balance into my Roth IRA but keep the account open. Future contributions follow the same pattern: make deposit then send in the withdrawal form.

Really straightforward from a mechanical standpoint. Mark will take care of the 1099-R at the end of the year as part of their yearly fee, so all I really have to do is remember to tell my accountant about it so they can file the right forms at tax time.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #2 on: June 24, 2017, 10:07:47 PM »
Thank you I really appreciate it.
I see the fee for the first year is $795, and then it's $125 per year thereafter.  Kind of pricey upfront. The yearly fee after that is cheaper than the company Harry Sit uses, which charges $195 per year.

I already contributed money for the 2017 year as the employee to my Fidelity solo 401k. I wonder if I still can use MySolo401k.net for 2017 ?
I think this year I could easily contribute $9 - $10K in after tax contributions.
« Last Edit: June 24, 2017, 10:12:23 PM by DavidAnnArbor »

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #3 on: June 25, 2017, 05:22:22 AM »
I don't see why you couldn't. You would need to inform Mark about the old plan and then at some point have Fidelity roll the money into accounts that you're trustee for, but it should be straightforward and not particularly time sensitive.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #4 on: June 25, 2017, 11:43:40 AM »
That would really be swell as I will definitely have decent business income this year and could really take advantage of doing non-deductible contributions  to the solo 401k (above and beyond the deductible employee and employer contributions).


DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #5 on: June 28, 2017, 09:34:52 AM »
So the forum on this question brings together a few of the owners of these solo 401k providers to answer a question from a prospective client.

https://www.biggerpockets.com/forums/51/topics/364326-self-directed-solo-401k-setup-question

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #6 on: July 04, 2017, 08:51:46 PM »
Right now I'm tied between discountsolo401k.com and mysolo401k.net

Discount is a little bit cheaper. Mysolo401k seems more polished on their website. Not sure who to go with.

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #7 on: July 05, 2017, 04:43:45 AM »
I would send some questions to both and see how they respond. Customer service is important with these things.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #8 on: July 05, 2017, 02:08:02 PM »
I was confused at first about the 1099-R that would need to be filed. But as it turns out according to Justin at discountsolo401k " the 1099 will be due the year after the conversion is actually made.
For example, you could determine your income for 2017, make the after-tax contributions for 2017 in 2018, make the conversion/transfer to Roth in 2018, and then the 1099-R for the 2018 transfer will be due is 2019."

This was revelatory for me, cause I thought I would somehow have to file a 1099 for  the after-tax contribution conversion/transfer in 2018.

Vilgan

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #9 on: July 11, 2017, 06:06:39 PM »
I do the mega backdoor roth on my own. I didn't find creating a 1099-R to be terribly difficult, so my main cost was just setup. I send a check off every month for the after tax contribution then periodically send in the form to Fidelity to roll it over to my Roth IRA. This has been relatively painless, the main issue was just getting everything set up and signing the "do it legit" forms etc.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #10 on: July 11, 2017, 07:01:10 PM »
Which company did you use and how much did it cost you?

Vilgan

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #11 on: July 19, 2017, 10:45:54 AM »
The same woman Harry Sit mentions in his article that isn't Ascensus.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #12 on: July 19, 2017, 12:50:09 PM »
Oh ok. I need to look up her price again. I thought she was kind of expensive

Discountsolo was about $500 the first year, and $100 each year thereafter.

I am wondering if I can do one of these companies for just a couple of years and then revert back to my regular solo 401k plan with Fidelity. I think I only have about 2 years of heavy work left in me.

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #13 on: July 19, 2017, 01:38:32 PM »
Oh ok. I need to look up her price again. I thought she was kind of expensive

Discountsolo was about $500 the first year, and $100 each year thereafter.

I am wondering if I can do one of these companies for just a couple of years and then revert back to my regular solo 401k plan with Fidelity. I think I only have about 2 years of heavy work left in me.

Yes, that's fine. You can amend or replace your plan at any time. The IRS frowns on cancelling it outright before 5 years, especially if you cancel it immediately prior to hiring employees. 401(k)s are supposed to be permanent plans.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #14 on: August 30, 2017, 02:01:46 PM »
Ok I just started the application process with DiscountSolo401k. It's $575 the first year, and $100 each year thereafter.

If I don't want to continue to do megabackdoor roths anymore I can switch my solo 401k back with the original Fidelity provider, and therefore not have to continue to pay the $100 yearly fee. 

I'm doing this just to put more money in a space whereby taxes won't be incurred anymore.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #15 on: September 05, 2017, 09:32:45 PM »
Definitely more complicated than I initially thought.

First, I got the plan documents from DiscountSolo401k. I had to sign several documents and then I scanned the signed documents.
Now I'm filling out the Fidelity non-prototype plan application, found at https://www.fidelity.com/customer-service/forms-applications/nonprototype-retirement-complete

The Fidelity non-prototype plan application has some confusing options that I had to run by DiscountSolo401k.

Plan Name:  Has to include the word Trust at the end, and of course I need an EIN number for this Trust.
Plan Structure has 2 options:
  • a pooled account directed by the trustee
  • account for each participant (FBO) account
 
I was recommended to pick the first one, which seems to contradict what Harry Sit mentions in his finance blog. I was told that since I'm a single participant plan it really doesn't matter much.

My new non-prototype plan is designated as an "Other Qualified Plan"

I'm told the Funding Option doesn't have to be filled out because I'm going to be transferring existing assets from my already existing Fidelity self-employed 401k plan.

I have to attach the first few pages of the Adoption Agreement and include the signature page of this agreement.

My plan documents/ adoption agreement specifically state it is an "amendment and reinstatement of a preexisting plan. . . " an amendment to the prototype plan Fidelity has for self-employed single participant plans.

I have to submit three of these applications so that I can have 3 accounts.
  • Pre-Tax Account.  This account will receive the EmployEE salary deferrals and the EmployER profit sharing contributions.
  • After-Tax Account. In this account I'll be able to add Voluntary Employee Contributions, up to the point where I don't exceed the smaller of the adjusted business profit or 54,000
  • Roth account, where I will be able to do rollovers from the After-Tax account - hence the megabackdoor Roth.
     
I have to move the assets in my already existing Fidelity Individual 401k plan over to the new plan's Pre-tax Account.
In order to move these assets I have to submit a "Letter of Instruction". This letter states:
"Please make a non-reportable transfer of assets in kind from my Fidelity Individual 401k plan Account number ****** (******* Self-Employed 401k trust) into the new non-prototype plan. "

Moreover, all three applications and hence all three accounts are all under the same Trust name and EIN number.

Tomorrow I hope to make it to the Fidelity office to file these 3 applications. I hope it works out.






« Last Edit: September 05, 2017, 09:44:13 PM by DavidAnnArbor »

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #16 on: September 06, 2017, 04:47:23 AM »
Are you making a Roth 401k account or a Roth IRA? The meta backdoor transfers from after tax 40-k to a Roth IRA outside of the 401k trust. That's why you have to file a 1099 when you do that part of the rollover.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #17 on: September 06, 2017, 01:30:45 PM »
I don't quite understand that part. It sounds like it is a Roth 401k. Maybe I should ask ?

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #18 on: September 06, 2017, 01:43:33 PM »
This early afternoon I was able to bring the 3 applications over to the Fidelity office nearby me. Customer rep said it would be no problem at all to have the 3 account numbers under the same Trust name and EIN number. I also brought the pertinent pages of the plan documents with me along with a Letter of Instruction.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #19 on: September 06, 2017, 02:02:58 PM »
Ok I got a response back,

"The Roth component of the 401k plan is a Roth 401k, not a Roth IRA. Yes, a 1099R is required for conversion of after tax funds to Roth as well. The difference is that box 2a of the 1099, "Taxable amount" will be 0 for after-tax contributions, but not pre-tax contributions that are converted."

Vilgan

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #20 on: September 06, 2017, 02:33:10 PM »
I personally would just have a Roth IRA at Fidelity and instruct them to move the money there. That's what I did, and seems to (in my opinion) reduce the odds of issues down the road as it will be clearly and unambiguously in a Roth (that they track) each time you roll the money over.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #21 on: September 06, 2017, 02:38:00 PM »
I think I should be ok keeping track of it, since it will be in its own separate account.

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #22 on: September 06, 2017, 06:35:33 PM »
I use a Roth IRA at Fidelity to accept the after-tax rollovers. My understanding is that having it in an IRA is strictly better than having it as part of the trust. There are no ordering rules in a Roth 401k, for example. Whenever you take a non-qualified distribution you'll be paying pro-rats tax plus the 10% penalty tax.

My plan has the capability of a Roth 401k subaccount but I haven't bothered because it's just as easy to distribute to a Roth IRA and you get the normal Roth benefits that we MMMers care about.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #23 on: September 06, 2017, 08:26:25 PM »
I don't think I would be taking any non-qualified distributions from the Roth 401k. I just figured it would be there for a long time.

But I think you mean using the Roth IRA to fund early retirement.  It's true if that was what my plan was I would definitely prefer the Roth IRA instead.
I already have a lot of money in taxable accounts to use.

But I'm almost 52, and I won't be touching this money any time soon.
« Last Edit: September 06, 2017, 08:30:14 PM by DavidAnnArbor »

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #24 on: September 08, 2017, 04:56:04 PM »
I got all three non-prototype individual 401k accounts up and running with Fidelity. One is designated as my Pre-tax account, and the assets in kind were transferred there from my old Fidelity individual 401k plan. The other 2 accounts are the after tax contribution account, and the Roth 401k account.

After I have my calculations made for the year I can then make the 2017 employer contribution and then determine what space would be left for the aftertax contribution.  Won't really know that until this year is up, but I have an approximate idea already - so I probably can make some conservative contributions anytime this year. Then I'll round them up in early 2018 when the numbers are finalized.

It sure feels good growing that Roth without have to forego the tax advantages of pre-tax contributions such as the traditional ira.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #25 on: September 23, 2017, 12:06:50 PM »
I asked Justin Windham of Discount Solo 401k the following:

"Let's say in 3-4 years I partly retire and I can't take advantage of after tax contributions anymore because my income isn't high enough.
How do I revert back to my Fidelity prototype solo 401k plan?
What happens to the money in the Roth component of my non-prototype plan that I set up under your plan? Do I roll that into a Roth-ira ? Or do I just leave it be til I fully retire?"

His response:

"If you still have self-employment activity, but not enough income to keep making the after-tax contributions, you can keep your new Solo 401k as you have it now until you fully retire. The new plan will allow to to do anything the Fidelity plan can do plus a whole lot more. You can also choose to revert back to Fidelity by opening a Solo 401k with them as a restatement of your existing plan. At the point you could transfer the Roth 401k funds to a Roth IRA, if desired. Keep in mind, that transfer is permanent in that you cannot transfer assets from a Roth IRA to anything beside another Roth IRA (no revision back to a Solo 401k Roth account). It seems like this would be fine based on your intentions, but I'd like to mention it just in case.

Please let me know if you have any other questions."

I feel like this was a good answer to my concern. I really appreciate the flexibility of being able to revert back to the Fidelity Solo 401k if needed. I feel more confident than ever about going down this road.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #26 on: September 25, 2017, 08:30:05 PM »
Wow these were like sensei masters explaining to me what the maximum solo 401k non-deductible contributions are allowed for my income situation.

https://www.bogleheads.org/forum/viewtopic.php?p=3547428#p3547428