Author Topic: Anyone Execute a mega backdoor roth in solo 401k ?  (Read 7236 times)

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #50 on: March 14, 2018, 08:57:00 PM »
Why do you deduct the profit share from the employee compensation?  The employee compensation is already calculated as Net Profit minus Profit Share.

Shouldn't the income be broken down as -
Profit Share: 10,719
Employee Compensation: 42,874

which would then give -
Employee Salary Deferral: 18,000
Employee after-tax: (42,874 - 18,000) = 24,874 ?

I thought so too when I first read about this formula.  But according to the formula for determining "Employee Compensation" from self-employed Schedule C income, you have to deduct the profit sharing to arrive at the definition of what Employee Compensation is.  Sorry I'm not a great writer.
Then once you get "Employee Compensation" the annual additions to the 401k is limited to either 100% of Employee compensation or 54,000 for 2017, whichever is less.

It's a bitch, because you end up having to deduct out the profit sharing twice. So it sucks!


Hmm, when I filed my taxes, I didn't even put any 401k amounts on my schedule C.  It all ended up on 1040 line 28.

Which lines are you considering for the schedule C calculations?  19 and what else?

So to arrive at "Employee Compensation" one is just taking the Schedule C business income and doing a separate calculation on a worksheet totally separate from the tax return to arrive at "Employee Compensation." And you have to use the formula I outlined previously.

Yea, I was just trying to find the IRS instructions on this calculation.  I will have to look through those other pages you linked to.  Thanks as always!

If you go to the end of the comments section on the blog post, you'll see the scolding I received from Avi, a tax expert, on this very issue
https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

Avi links to the Annual Additions tax law, saved somewhere at a Cornell University webpage.
« Last Edit: March 14, 2018, 09:02:16 PM by DavidAnnArbor »

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #51 on: March 14, 2018, 08:59:25 PM »
And then Avi's comments were confirmed by another tax expert, Spirit Rider, on this post on Bogleheads:
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=244071

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #52 on: March 15, 2018, 05:08:12 AM »
Thanks, again.

For anyone else who may be interested, here is the thread where Spirit Rider clarifies the 403b / solo 401k contributions https://www.bogleheads.org/forum/viewtopic.php?f=1&t=231722&p=3621977

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #53 on: March 15, 2018, 07:16:08 AM »
That's an excellent resource Wudged.  It's a very unfortunate quirk of the 403b, and prevents potentially another 18,000 to be utilized in the individual 401k. That explains Harry Sit's spreadsheet regarding the 403b question.

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #54 on: March 15, 2018, 03:27:30 PM »
For even more specifics, you can view the IRS Publication 571 at https://www.irs.gov/pub/irs-pdf/p571.pdf .  Page 4 under section 3 Limit on Annual Additions has the particular paragraph pasted by Spirt Rider at the end of this post https://www.bogleheads.org/forum/viewtopic.php?p=3621977#p3621977 .

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #55 on: March 15, 2018, 06:44:19 PM »
This spreadsheet you linked to seems out of whack.

I enter -
Gross Wages: 500,000
Salary Deferral: 0
Are you age 50 or over: no
Net Business Profit: 30,000

and get a profit sharing value of 5,799.

If I change Salary Deferral to 18,000, the profit sharing goes up to 5,920.  Why does the profit sharing change at all, when the gross wages are well above the SS maximum?  Only net profit and a change in SS should change the profit sharing amount.
Yes I agree I don't understand that either. That's worth posting a question to Harry Sit on his blog. https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html


Doh!  Further investigation made me realize that net profit for this scenario is 29,598.  Without the W2 contribution, this gives solo 401k salary deferral at 18,000 and leaves total employee compensation at 23,799.  Since the total of all contributions can't be greater than the compensation, 23,799 - 18,000 leaves only 5,799 for profit sharing.

A similar thing happens if you change over 50 to yes, the catch up contribution is only 5,799 instead of 6,000, as 23,799 employee compensation plus the catch up can not exceed net profits of 29,598.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #56 on: March 15, 2018, 07:12:54 PM »
This spreadsheet you linked to seems out of whack.

I enter -
Gross Wages: 500,000
Salary Deferral: 0
Are you age 50 or over: no
Net Business Profit: 30,000

and get a profit sharing value of 5,799.

If I change Salary Deferral to 18,000, the profit sharing goes up to 5,920.  Why does the profit sharing change at all, when the gross wages are well above the SS maximum?  Only net profit and a change in SS should change the profit sharing amount.
Yes I agree I don't understand that either. That's worth posting a question to Harry Sit on his blog. https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html


Doh!  Further investigation made me realize that net profit for this scenario is 29,598.  Without the W2 contribution, this gives solo 401k salary deferral at 18,000 and leaves total employee compensation at 23,799.  Since the total of all contributions can't be greater than the compensation, 23,799 - 18,000 leaves only 5,799 for profit sharing.

A similar thing happens if you change over 50 to yes, the catch up contribution is only 5,799 instead of 6,000, as 23,799 employee compensation plus the catch up can not exceed net profits of 29,598.

yes that makes sense. thanks for figuring that out for future readers.

Kakashi

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #57 on: March 26, 2018, 03:20:29 PM »
David, thanks for sharing your experience.  I happen to be going through the same thing but just several months behind.  I just got my plan documents with Justin at Discountsolo401k, and in the process of figuring out this backdoor Roth 401K (instead of Roth IRA).  Your posts and references have been very helpful. 

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #58 on: March 27, 2018, 08:40:42 PM »
I'm glad it's helpful Kakashi
It's definitely a great way to stack additional money into a Roth if one is self-employed without employees.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #59 on: April 07, 2018, 08:22:06 AM »
Well I don't know if this is true or not but E*trade may have an individual 401k plan that allows an "In-Plan Roth Rollover"
Now this is not the same as rolling over after-tax contributions to a Roth IRA, but it is a rollover from an after tax contribution to a Roth 401k within the plan.

There's an interesting discussion about this on bogleheads: https://www.bogleheads.org/forum/viewtopic.php?f=2&t=241317

https://content.etrade.com/etrade/estation/pdf/Qualified_Retirement_Plan_App.pdf   - that's the link to the E*trade application and go to page 19 to view the in plan roth rollover feature.

I'm not sure if E*trade's individual 401k plan allows after-tax contributions however, the discussion was a bit confusing to me.

Also spiritrider gives advice on how to change your plan provider if you want to:

"Yes, you can change your one-participant 401k provider. It is not as simple as a rollover, but not by that much.

First, you need to understand that your 401k plan belongs to the sponsor and not any one specific provider. The IRS intends for 401k plans to be semi-permanent.

If you want to change providers:
Amend your plan to the new provider by completing their adoption agreement. That agreement will have an option to amend an existing plan rather than to adopt a new plan.
Transfer the assets from the old plan to the new one.
When all is completed, notify the old provider that they can close the now orphaned account. They may or may not care and just clean up the account at some time in the future, because it is empty and idle.
Note: There is no reason to terminate the plan. It will only complicate things.
There is no reporting to the IRS."
« Last Edit: April 07, 2018, 08:23:48 AM by DavidAnnArbor »

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #60 on: April 07, 2018, 03:10:00 PM »
Alas, it looks like E*TRADE doesn't allow for after tax contributions.

Kakashi

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #61 on: April 10, 2018, 09:00:39 PM »
It seems for non-prototype solo 401K, the 2 main custodians are Schwab and Fidelity.

Fidelity seems a bit more "formal".  They got a bunch of forms for if you want to withdraw, contribute, etc.  They seem to have a direct-deposit form to allow funds to go in via ACH.  Plus, both David and Harry Sit have talked about essentially their step-by-steps.  I'm a bit confused whether to open up 3 pooled accts like David or 3 participant accounts like Harry Sit.  I think at the end of the day, they're both essentially the same thing.  Once 4/18 rolls around, I'll call into Fidelity and ask them these questions myself (I was advised they are going to be very busy up until Tax Day 4/17, and advised me to wait until 4/18 if I can).

I cannot find anything on Schwab's CRA in terms of other people's experience.  There was a question posed on BH in 2016 that no one ever replied to.  Like Fidelity, they have a "Master" account and "Participant" sub-accounts.  They will not allow more than 1 Master account per Plan.  Hence when I spoke to them, they advised that to do the 3 accounts, essentially it's 1 Master with 3 participant accounts.  However, only the Master will have the ability to write checks.  Which then poses multiple questions like how to do a rollover to Roth from after tax, or how to use Roth to invest in non-public assets such as real estate.  They have no designated forms for these actions.  Of course, you can either hire a TPA or keep track of everything, but that just complicates things. 

It seems like Fidelity is a bit more suited for the DIYer.  Unfortunately, I like Schwab a bit better for its investment options. 

I was going to just write a memo to myself of where I left off my research to pick it up at a later date.  But thought I'd post it here instead. 


DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #62 on: April 11, 2018, 06:59:44 AM »
Great information Kakashi.
It's amazing how a solo 401 k with this back door roth ability can really rev up the early retirement savings.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #63 on: June 05, 2018, 03:42:18 PM »
Another important thread on bogleheads which helps clarify the various rules regarding the after-tax contributions. The thread also highlights the importance of IRS required record keeping.

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=250946&p=3959703#p3959703