Author Topic: Anyone Execute a mega backdoor roth in solo 401k ?  (Read 8768 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

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #64 on: June 29, 2018, 12:15:06 PM »
Regarding IRS record keeping I just received an email from Justin at DiscountSolo401k about the importance of filing IRS Form 5500-EZ due by July 31st if your assets in the Individual 401k plan are $250,000 or more.

He writes, "Form 5500-EZ is a very simple informational return and there are no taxes due in connection with the form. If you need to file this form and would like more information about the filing, please see the attached guide. Here is a link to the form on the IRS website: https://www.irs.gov/pub/irs-pdf/f5500ez.pdf  "


I've enclosed the guide to Form 5500-EZ on here

Kakashi

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #65 on: July 05, 2018, 11:59:55 AM »
This was really helpful David.  I'm posting what I did in case it helps someone else out.

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.
I also picked the pooled account since I have no other employees. 

I called Fidelity and they said to mark down "401K" rather than "Other Qualified Plan".  But said it honestly doesn't matter in terms of the account setup


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.

The account application says a minimum of $500 to open each account.  However on speaking with the rep, they said you don't need any money to start the account.  If no activity, the accounts will remain open for 2 years.  So I opted to open 4 accounts.   I had to submit 4 applications.  It's literally the same application printed out 4 times.  Except for one of the accounts, I requested checkwriting privileges.  Which not only is it a checkbox in the application, there is a separate Checkwriting form that needs to be sent in.  There are 2 different checkwriting forms - Retirement and Nonretirement.  You would fill out the Nonretirement checkwriting form (even though this is your retirement account). 

When the accounts are opened, then you can log into Fidelity.com and rename the accounts however you like. 

I named mine 1) Pretax 2) Rollover 3) Aftertax  4) Roth

The reason I opened a separate Rollover account is specifically the Discount Solo 401K plan allows in service rollovers to Roth of all accounts.  However IRS rules stipulate that Employee Elective Deferrals can only rollover to Roth after 59.5 years old.  Whereas EmployER contribution and Rollovers from other 401K plans can rollover to Roth at any time.  This matches what is in the plan documents.  I just wanted to reserve this option to do an early rollover or partial rollover to Roth in case in the future my income happens to drop putting me in a lower tax bracket. 

I actually sent my applications in.  It had some hiccups.  Like for some reason, they didn't see that I submitted my plan documents.  After calling in, this was fixed and my accounts are opened. 

I noted that on statements, the name on the account is:

Me Trustee
My Company 401k Plan

Even though I had specified the name on the account to be the Trust.  I called in about this and they said it's under the Trust name, however their statements are standard that way.

Now there's no way to directly ACH money into the account unless you have a bank in the name of the Trust.  There are 2 workarounds if you want to stay electronic and not use US mail or stopping by a Fidelity branch:
1) You can set up a Business brokerage account with Fidelity with you as the owner
2) You can just use your business bank's bill pay (which is still US mail, but you're not stamping envelopes).

I'll just stick with the billpay option as I don't want to go through the hassle of opening up another Business account.


When calling into Fidelity, make sure you speak to a rep that deals with retirement and non-prototype retirement account.  I was led astray by a general Fidelity rep giving a lot of misinformation. 

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #66 on: July 06, 2018, 05:33:29 AM »
You can just use your business bank's bill pay (which is still US mail, but you're not stamping envelopes).

How do you do this?  Just sending a payment to Fidelity with your account number?  What name/address are you using?

I know this isn't the same thing, but I asked a Fidelity rep (non-prototype specialist) about doing an ACH transfer after finding this page https://www.fidelity.com/cash-management/deposit-money/determine-routing-and-account-number and was told that ACH was not possible, even though it specifically lists Z account numbers.  If sending bill pay instead is possible, the rep should have mentioned it to me.

Instead I have been using ACH between an outside account and a cash only account at Fidelity (in the name of the trust,) then I have to wait a week for it to clear and call in to Fidelity to do a transfer.

Kakashi

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #67 on: July 06, 2018, 10:11:42 PM »
You can just use your business bank's bill pay (which is still US mail, but you're not stamping envelopes).

How do you do this?  Just sending a payment to Fidelity with your account number?  What name/address are you using?

I know this isn't the same thing, but I asked a Fidelity rep (non-prototype specialist) about doing an ACH transfer after finding this page https://www.fidelity.com/cash-management/deposit-money/determine-routing-and-account-number and was told that ACH was not possible, even though it specifically lists Z account numbers.  If sending bill pay instead is possible, the rep should have mentioned it to me.

Instead I have been using ACH between an outside account and a cash only account at Fidelity (in the name of the trust,) then I have to wait a week for it to clear and call in to Fidelity to do a transfer.

I haven't actually done this myself yet as I just set up the account and actually sent in the deposit check with the application.  2 different reps told me about the billpay option.
If mailing in a check by yourself, there is a form for contributions to nonprototype account.  On the bottom is an address to mail to.  That's where I intend to send in the billpay:

Regular mail
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0048

One of the reps told me the last 4 of the zip code is 0003.  I imagine it all gets to the intended target.  I had the same issue with Vanguard where the last 4 of zip code is different on different forms, but I never had an issue getting to the intended receiver.

Also, you will need to specify in billpay the Account # that you intend to deposit into.  And so, if you have 3 accounts, you may need to set up 3 different billpays. 

But like I said, I haven't done it yet myself, but 2 reps recommended as the most convenient way of doing it.  One rep I spoke with recommended the 2 step process what you're describing. 



wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #68 on: July 07, 2018, 07:03:36 AM »
Thanks!  This would be much more convenient as it's always a minimum of 20 minutes on hold when I want to do the transfer, not to mention funds sitting in the cash account for a week before they will allow me to perform the transfer.

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #69 on: July 09, 2018, 03:07:09 PM »
I just called and verified, so will be setting up a payment tonight to try it out!  The rep did confirm the 0003 instead of 0048 is a better +4 - so the full address is:

Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #70 on: July 11, 2018, 06:47:29 PM »
I've just been doing the slow method of transferring money from my bank account to a Fidelity Cash account. Then like you mentioned, the money has to sit there for a week before it's available to be transferred (via a phone call to the Fidelity rep) to the non-prototype accounts.

And sometimes I just go to the Fidelity office which is a 7 minute drive away and I just provide a check.

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #71 on: July 13, 2018, 03:00:15 PM »
Entered bill pay on Monday night - earliest I could set it to pay was Thursday.  The amount showed up in the correct Fidelity accounts today, and it still hasn't even cleared my bank account - probably not until Monday.  So far I would call it a great success!  Now to work on Fidelity getting rid of having to mail-in / drop-off a hard-copy rollover form...

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #72 on: July 30, 2018, 08:17:42 PM »
So as I accumulate cash from my business it just sits in a bank account earning nothing.

I'm thinking that I should put that money in a ultra short term bond fund ETF. Specifically ICSH - iShares Ultra Short-Term Bond ETF

The Fidelity brokerage accounts offers free trades on this ETF.

And right now the yield is up to 2.5%
https://www.ishares.com/us/products/258806/ishares-liquidity-income-etf

This way when I'm ready to move money into the non-prototype accounts for the Solo 401k the money is already there in Fidelity.

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #73 on: August 15, 2018, 05:27:15 AM »
So instead of setting up 3 account (traditional, roth, after-tax) I only set up 2 (traditional / after-tax) and have been doing a rollover from after-tax to a Roth IRA, but only of the contributions.  Since Fidelity doesn't have fund or way to not earn interest, I've accumulated a few dollars of growth there.

Am I able to roll this over to the traditional account, or do I need to create a Traditional IRA that it would have to be rolled into?  If the latter, I'll just roll it all over to the Roth IRA and pay the tax on it.  That might just be the easiest option in either case.

DavidAnnArbor

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #74 on: August 15, 2018, 08:16:00 AM »
I was under the impression from the Harry Sit columns or other blogs that it has to roll over into the traditional IRA or the Roth IRA or Roth 401k.
But not sure it makes any sense.

protostache

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #75 on: August 15, 2018, 12:38:21 PM »
So instead of setting up 3 account (traditional, roth, after-tax) I only set up 2 (traditional / after-tax) and have been doing a rollover from after-tax to a Roth IRA, but only of the contributions.  Since Fidelity doesn't have fund or way to not earn interest, I've accumulated a few dollars of growth there.

Am I able to roll this over to the traditional account, or do I need to create a Traditional IRA that it would have to be rolled into?  If the latter, I'll just roll it all over to the Roth IRA and pay the tax on it.  That might just be the easiest option in either case.

Either path is fine. If you want to roll it into your traditional 401(k) subaccount you have to bounce it through a traditional IRA first. The simplest path from my standpoint is to just pay tax on the few dollars of interest.

wudged

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Re: Anyone Execute a mega backdoor roth in solo 401k ?
« Reply #76 on: August 15, 2018, 04:05:53 PM »
Thanks, that's what I figured.  It's already too much of a hassle the Fidelity requires hard-copy forms to do the transfer in the first place.  No need to duplicate the process.