The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: DavidAnnArbor on June 22, 2017, 12:13:44 AM
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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
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I've done it. My business's solo 401k is through MySolo401K.net (https://www.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 (https://www.fidelity.com/retirement-ira/small-business/investment-only-plans) 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.
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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.
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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.
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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).
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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
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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.
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I would send some questions to both and see how they respond. Customer service is important with these things.
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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.
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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.
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Which company did you use and how much did it cost you?
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The same woman Harry Sit mentions in his article that isn't Ascensus.
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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.
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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.
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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.
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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.
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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.
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I don't quite understand that part. It sounds like it is a Roth 401k. Maybe I should ask ?
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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.
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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."
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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.
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I think I should be ok keeping track of it, since it will be in its own separate account.
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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.
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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.
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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.
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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.
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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
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On Nov. 27th I put 12,000 into the after tax account of my non-prototype plan. Then on Dec. 2nd, I moved that money into the roth account - this is the rollover.
Justin from DiscountSolo401k had my fill out an In plan Roth conversion form, for the administrator and the employee to fill out - both me.
This 12,000 represents part of what I will contribute to the after-tax account of my 401k plan for the 2017 tax year. I anticipate it will actually be closer to 17,000 when my profit numbers are finalized for 2017. I'll top up this contribution some time before tax day in 2018.
I'll need to file a 1099-R with the IRS by Jan. 31st for this non-taxable rollover.
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Upshot: 12,000 of savings was essentially put into a Roth - because my business income has enough space for it.
I easily filed the 1099-R with the IRS today using the website www.tax1099.com - it was only $2.90
And filing with the IRS automatically includes filing with Michigan.
The $12,000 I put in the after-tax contribution sub account had $1 of earnings so I had to take that into account for my 1099.
I followed Harry Sit's blog on how to fill out the 1099-R https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html
On the 1099-R
Line 1: 12,001
Line 2a: 1
Line 5: 12,000
Line 7: Code G
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What's the deadline for after-tax contributions? Is it too late to put money in for 2017?
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No it's not too late. It's your tax filing deadline, so April 15th or when you file your taxes.
Think of it this way, if you're a self-employed business, it's simply not possible to know the exact maximum amount you'd be able to contribute, until you close the books for 2017.
In fact when I know my exact numbers I'll likely have another approx. $5k to add to my after tax contributions for 2017
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What do you do about the earned interest in the Fidelity Trust Cash account? Can that just be moved back to your personal account? Are you supposed to file a tax return for the trust?
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Do you mean in the roll over from the After tax account to the Roth account ?
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I transfer money from my personal account to a trust cash account at Fidelity.
Then I have to call them up and transfer from that cash account into the two non-prototype accounts (one for pre-tax, one for after-tax).
In the interim, the cash is just sitting there and each month I get a few pennies interest. I asked if it was possible to move into a fund besides "core" that earns no interest and the rep sounded appalled.
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And also, big thanks to you for starting this thread! The whole process was complicated enough even with all the information posted here, but this was a great help in getting through it all.
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I don’t think it’s that common to have a separate trust-level account. I just have FBO accounts that I transfer directly into.
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Since it's likely less than a $1, I think you can just transfer that too, and not worry about it.
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I don’t think it’s that common to have a separate trust-level account. I just have FBO accounts that I transfer directly into.
I'm not sure. I ended up going with discountsolo401k.com who told me the trust account was the first step - or maybe it was Fidelity who said so - I can't remember at this point. This whole process is so uncommon that nobody really seemed to know exactly how to set it up, which is why this thread was a big help.
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I'm glad it was helpful. Also, do check out Harry Sit's blog, Finance Buff, he devotes a couple of blog posts specifically toward the megabackdoor roth.
The implication of how much assets can be put into a Roth, using this method, is huge. Tens of thousands of dollars each year.
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So Harry Sit's latest blog post was about the administrative work involved in having a solo 401k plan, and it got me a bit afraid and also raised my awareness about some of the requirements to maintain the plan. https://thefinancebuff.com/solo-401k-not-bigger-ira.html
One thing that is required is that an employee is supposed to make an election for salary deferral prior to the beginning of the year.
So an election for 2018 salary deferral needs to be made by the end of 2017.
Justin Windham from DiscountSolo401k gave me a "Deferral Election Form" to make that election.
In addition he also gave me the "In-Plan Roth Conversion Form" which I fill out prior to making that after tax to roth rollover.
I will add both these forms as attachments in this post, so that you can use them.
I also maintain an excel spreadsheet in which I list my contributions along with the date. I list whether the contributions is going to the Pre-tax account or the After-Tax account. Then I also list which tax year this contribution is for. Additionally, I list whether the Pre-tax contribution is Employee Salary Deferral or Employer Contribution. For the After-Tax account I list whether it's a voluntary employee contribution or a rollover from that account over to the 401k-Roth account.
I also have the Fidelity statements to corroborate the above excel spreadsheet list.
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So I had a rude awakening about how to calculate the maximum after-tax deduction I'm allowed to take.
Here's the formula:
Net Business Profit (from Schedule C, also line 12 on 1040)
Subtract Deductible Self-employment tax (from line 27 of 1040)
This is the Adjusted Net Business Profit
Determine your Profit Sharing Number ( I take the maximum amount )
Subtract this Profit Sharing contribution from your Adjusted Net Business Profit
This becomes your "Employee Compensation"
From Employee Compensation deduct your Profit Sharing Contribution as well as "Employee Salary Deferral" amount if any.
The net number is the maximum you can contribute as an after tax contribution to your 401k plan.
With the Employee Salary Deferral don't include the $6,000 catch up provision for being 50 or older - that's good cause it means it won't reduce the amount I can contribute to the after tax account.
Here's some numbers:
maximum after-tax contribution should be:
$57,667 Net Business Profit
$ 4,074 Deductible Self-employment tax
$53,593 Adjusted Net Business Profit
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$10,719 Maximum Profit Sharing
$42,874 Employee Compensation
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$18,000 Employee salary deferral ($6,000 >= age 50 is not included in the 415c limit)
$10,719 Employer profit sharing
$14,155 Employee after tax voluntary contributions
The $6,000 catch-up contribution is not included in the annual addition limit. This applies to both the 415c 2017 $54K statutory limit and the 100% of compensation limit.
Harry Sit has updated his excel spreadsheet to help with this on his thefinancebuff blog
Here's the link:
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
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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 ?
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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.
Now change Net Business Profit to 100,000, and see after tax is 34,268. And now change the 403b yes/no question to Yes. Why does the after tax drop to 16,268? Aren't the W2 employer plan and the self-employed plan completely separate (in regards to the 54k limit - I know combined the employee tax deferred limit is 18,000 for 2017 / 18,5000 for 2018)
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In regards to the 403b question, I think the spreadsheet is attempting to consider that 403b annual addition limits for ALL contributions is 54/55k.
According to this page, this appears to only apply to 403b accounts - https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits , and should not apply at all to the spreadsheet, since it is specifically for a solo 401k.
However, this page says contributing to a 403b does limit contributions to a 401k https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2018-irs-401k-contribution-limits.aspx It then links to a page that has information from 2012 on it...
And then again the IRS page confirms the 55k per employer ... https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Any tax experts have any insight on 401k and 403b combined limits?
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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!
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In regards to the 403b question, I think the spreadsheet is attempting to consider that 403b annual addition limits for ALL contributions is 54/55k.
According to this page, this appears to only apply to 403b accounts - https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits , and should not apply at all to the spreadsheet, since it is specifically for a solo 401k.
However, this page says contributing to a 403b does limit contributions to a 401k https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2018-irs-401k-contribution-limits.aspx It then links to a page that has information from 2012 on it...
And then again the IRS page confirms the 55k per employer ... https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Any tax experts have any insight on 401k and 403b combined limits?
I believe that salary deferral is limited to 18000 per person across all 401k/403b plans.
The profit sharing/After tax can be 54000 per employment situation.
So if you max out 18000 at your day job in a 403b, then there's no salary deferral left for the solo 401k plan. But you can do profit sharing and after tax contributions to it.
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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?
In regards to the 403b question, I think the spreadsheet is attempting to consider that 403b annual addition limits for ALL contributions is 54/55k.
According to this page, this appears to only apply to 403b accounts - https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits , and should not apply at all to the spreadsheet, since it is specifically for a solo 401k.
However, this page says contributing to a 403b does limit contributions to a 401k https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2018-irs-401k-contribution-limits.aspx It then links to a page that has information from 2012 on it...
And then again the IRS page confirms the 55k per employer ... https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Any tax experts have any insight on 401k and 403b combined limits?
I believe that salary deferral is limited to 18000 per person across all 401k/403b plans.
The profit sharing/After tax can be 54000 per employment situation.
So if you max out 18000 at your day job in a 403b, then there's no salary deferral left for the solo 401k plan. But you can do profit sharing and after tax contributions to it.
That's my understanding also, but the spreadsheet isn't programmed that way it seems. Based on your posts, I suspect you may be in contact directly with Harry Sit and may want to inform him of this. It probably doesn't apply to you, but I assume he would want a correct spreadsheet.
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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
Now change Net Business Profit to 100,000, and see after tax is 34,268. And now change the 403b yes/no question to Yes. Why does the after tax drop to 16,268? Aren't the W2 employer plan and the self-employed plan completely separate (in regards to the 54k limit - I know combined the employee tax deferred limit is 18,000 for 2017 / 18,5000 for 2018)
I seem to recall Spirit Rider mentioning this on the bogleheads forum about the 403b having this effect, I don't totally understand this. It would be worth asking that question on bogleheads forum.
Here's my post on the topic of after tax contributions there: https://www.bogleheads.org/forum/viewtopic.php?f=2&t=244071
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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.
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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!
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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.
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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
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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
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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.
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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 .
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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.
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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.
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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.
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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.
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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."
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Alas, it looks like E*TRADE doesn't allow for after tax contributions.
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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.
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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.
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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
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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
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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.
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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.
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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.
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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.
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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
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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.
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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...
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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.
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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.
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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.
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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.
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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.
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Woah, just discovered something regarding getting funds from your bank account into Fidelity's nonprototype account.
As I mentioned before, you can do a billpay from your bank, which is via US mail. For me, this took approximately 12-13 days from initiation until posting in the account. It works.
However, on the same account, I have checkwriting privileges. The bottom of the check has routine/acct #. The routing # is for UMB bank that Fidelity uses as an intermediary because they aren't a bank. The acct # starts with 5 digits, and then the rest of the digits is the same as the account # for Fidelity.
You cannot link the accounts via ACH. However, my bank has the ability to send funds directly to a bank via routing/account #. So I asked a Fidelity non-prototype rep what would happen if I directly send it that way. He said it will probably work, I can give it a shot.
So I tried it yesterday with $1, and then today, $1 is transferred into my Fidelity nonprototype account! Once it fully clears, I'm going to try again with a much bigger sum.
I know most banks don't have this ability. I know Ally Bank that I use for personal accounts probably can't do this.
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Pretty cool! Weird that it takes you 2 weeks though fir bill pay, as it only takes me about 3-4 days.
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Pretty cool! Weird that it takes you 2 weeks though fir bill pay, as it only takes me about 3-4 days.
Once Fidelity gets the check, the credit the account even though my bank hasn't deducted it yet so it's pretty fast on Fidelity's end. I figure 3 days to process, 3 days for US mail, throw a weekend in there or 2...
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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.
Well unfortunately this etf isn't commission free.
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I loved this tidbit of info. from SpiritRider on Bogleheads about the language of megabackdoor Roth as well as proper filing instructions:
"Never use the term Backdoor Roth for non-deductible traditional IRA contributions followed by a Roth conversion when talking to an IRA custodian. Just take the two independent actions, you will receive a 1099-R and file your taxes correctly on Form 8606 and Form 1040 Lines 15a/b.
Never use the term Mega Backdoor Roth for employee after-tax contributions followed by an In-service rollover of both the after-tax contributions and taxable earnings. While the earnings are technically converted, it is just called a Roth rollover. Just take the two independent actions, you will receive a 1099-R and report the rollover on Form 1040 lines 16a/b.
Using inside baseball terms like Backdoor Roth and Mega Backdoor Roth will just confuse them. They know about the standard independent actions, not necessarily nicknames for the process. There are no such terms in IRS publications and/or guidance."
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=262893#p4193987
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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.
Thanks to this lovely "quirk" I am currently maxed out for the year at way less than the 55k limit. And stupid me jumped the gun by contributing too much after-tax, meaning regardless of any more income for the year, I won't be able to contribute anymore through the pre-tax account. Argh!
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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.
Thanks to this lovely "quirk" I am currently maxed out for the year at way less than the 55k limit. And stupid me jumped the gun by contributing too much after-tax, meaning regardless of any more income for the year, I won't be able to contribute anymore through the pre-tax account. Argh!
Are you saying you put the money in your after tax account? Would Fidelity be willing to just move that over to the pre tax account, while keeping all the investing transactions the same ?
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Yes, but I also already rolled it over to Roth. At this point it's easier to just deal with it as is instead of trying to reverse/undo everything. It will only end up costing me a few hundred in up front tax by not being able to contribute it to pre-tax instead of after-tax, which could very well end up cheaper than the tax free gains in the Roth in the long run.
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Just so you know Harry Sit's The Finance Buff blog has the formula fixed on the excel spreadsheet for calculating the max contributions you can make.
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
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I made my own a while back, just so I understand the calculations, and compare it to his all the time.
In past years (before I had 403b) I would adjust the numbers every month to calculate the maximum contribution up to that point, and it was never a problem. Now the 403b contributions are artificially setting the maximum contribution way below the $55,000 default maximum, so I am running into problems.
Just some fake numbers here to illustrate the point -
500k w2 salary
18,500 w2 deferral to 403b
20k employer contribution to 403b
50k self employment
The max profit share is 9,866 and max after-tax is 6,634, for a total of 16,500.
If I then increase self-employment to 75k, max profit share is 14,799 and after-tax is 1,701, again 16,500.
At 100k, it's 16,500 profit share with 0 after-tax.
So, thanks to this rule, the max I can contribute is 55,000 (max per plan) - 18,500 (employee contribution to 403b) - 20,000 (employer contribution to 403b) = 16,500 instead of the full 55,000.
Even if I were to do 0 employee contribution to 403b, that raises my solo 401k limit to 35,000, but doesn't provide any additional tax savings.
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And the employer contribution is definitely to a 403b and not a separate 401k plan ?
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Hmmm, good point! I just looked at the documents and all it mentions is 404c, which appears to be generic for allowing employees to select their own investments. I just assumed since the employee portion is 403b, that the employer portion is as well, but I shall try to find out.
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I would inquire.
I teach part time through the Public Schools, and I have a 403B for employee contributions, and I can also make 457 contributions as well. But the employer does matching, and it goes into a 401k.
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Thank you for bringing this up! I received this back from HR -
This money purchase plan is a defined contribution plan, which is intended to qualify under Section 401(a) of the Internal Revenue Code.
which, I believe, means the employer contributions do not have to be deducted from my Solo 401k maximum contribution.
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That sounds encouraging. I would try to get input on the Bogleheads forum from both SpiritRider and TFB because they both have plan administration experience.
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Confirmed by SpiritRider - https://www.bogleheads.org/forum/viewtopic.php?p=4201752#p4201752
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That's really great news Wudged !! Glad that worked out.
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Just so you know Harry Sit's The Finance Buff blog has the formula fixed on the excel spreadsheet for calculating the max contributions you can make.
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
Thanks so much for all of the wonderful information on this thread! Quick question regarding the spreadsheet you linked from Harry Sit's blog - why are income taxes not calculated on the profit? Wouldn't the after tax contribution limit be based on how much after tax income you actually make?
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The calculations are based on your "earned (gross) income" which is the before-tax amount. See the section "Contribution limits for self-employed individuals" on https://www.irs.gov/retirement-plans/one-participant-401k-plans
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I do believe the Medicare/Social Security tax is taken into account in the formula for figuring this out.
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Upshot: 12,000 of savings was essentially put into a Roth - because my business income has enough space for it.
I easily filed the 1099-R with the IRS today using the website www.tax1099.com - it was only $2.90
And filing with the IRS automatically includes filing with Michigan.
The $12,000 I put in the after-tax contribution sub account had $1 of earnings so I had to take that into account for my 1099.
I followed Harry Sit's blog on how to fill out the 1099-R https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html
On the 1099-R
Line 1: 12,001
Line 2a: 1
Line 5: 12,000
Line 7: Code G
Just a reminder to everyone that the January 31st deadline is coming up to file your 1099-R with the IRS for any 2018 calendar year rollover from the After-tax account to the Roth account.
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As the plan administrator your 2019 Election Deferral Form that you file with your employer (yourself) was due on 12/31/2018
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As the plan administrator your 2019 Election Deferral Form that you file with your employer (yourself) was due on 12/31/2018
David, do you mean that the last day of Employee Elective Deferral election for 2018 is 12/31/2018? (you put 2019). As an employee, you can change your election any time throughout the year by filing a new form. I don't think the last day for 2019 is 12/31/2018.
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It's not the last day you can make a change to it.
But in theory you're supposed to have something in place before the start of the 2019 year.
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Be aware of Turbo Tax's "Maximize Contribution to Individual 401(k)" checkbox. It calculated a full $18,500 on the employee side, which is not allowed since I had already contributed that much to my 403b. It might be just an issue with 403b and not 401k, but I'm not sure. I do remember doing this in the past when I contributed to a W2 401k and it not being a problem.
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I don't know if you can get support from TurboTax but maybe they have an explanation for you why the software is doing that?
Is TurboTax the best of the tax software out there?
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Someone asked on the finance buff blog whether, "can I perform quarterly rollovers from 401K to IRA since I will be contributing to the 401K throughout the year.
Will I need to file a 1099-R each time I perform a rollover or can I file one 1099-R at the end of the year for the cumulative amount rolled over from the after-tax 401K to Roth IRA? "
And Harry Sit responded, "You only need to file one 1099-R for the cumulative amount of the distributions."
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I'm very interested in creating a solo 401k as been described here extensively for the purpose of using after-tax (1099) money to eventually be placed into a Roth IRA, and I've found this thread to be incredibly useful and informative. I've been torn between mysolo401k.net and discountsolo401k, but it sounds like everyone has had good experiences with Discount Solo 401k. My question is that if I already have a Roth IRA account through Fidelity, why would I need to create more than just 1 new account for "After-Tax" (as opposed to the 3 or 4 accounts that other posters have done), and then just have periodic distributions rolled over to the already existing Roth IRA? I do not have a prior solo 401k through Fidelity or anywhere else.
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My question is that if I already have a Roth IRA account through Fidelity, why would I need to create more than just 1 new account for "After-Tax" (as opposed to the 3 or 4 accounts that other posters have done), and then just have periodic distributions rolled over to the already existing Roth IRA? I do not have a prior solo 401k through Fidelity or anywhere else.
I'm definitely not the authority on solo 401k's. But I imagine you need 2 accounts. 1) pretax and 2) aftertax. You don't need a "roth" solo401k account if you intend to just roll it into the roth IRA. Were you planning on JUST aftertax money? If so, are you already putting in 401k with an employer perhaps - which will complicate the situation in terms of how much you can put in.
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Some people prefer to roll the after tax money into a Roth IRA because they need to be able to have access to making withdrawals out of the Roth IRA as part of the early retirement strategy.
I'm older and I don't have a need to access Roth money anytime soon so I don't mind the rules for Roth 401k regarding when withdrawal is permitted.
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My question is that if I already have a Roth IRA account through Fidelity, why would I need to create more than just 1 new account for "After-Tax" (as opposed to the 3 or 4 accounts that other posters have done), and then just have periodic distributions rolled over to the already existing Roth IRA? I do not have a prior solo 401k through Fidelity or anywhere else.
I'm definitely not the authority on solo 401k's. But I imagine you need 2 accounts. 1) pretax and 2) aftertax. You don't need a "roth" solo401k account if you intend to just roll it into the roth IRA. Were you planning on JUST aftertax money? If so, are you already putting in 401k with an employer perhaps - which will complicate the situation in terms of how much you can put in.
Yes, just putting in aftertax money only as I'm already putting in max allowed through employer 401k (and they've refused to allow after-tax contributions despite me lobbying).
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Keep in mind you're allowed a separate employer deduction for your self employment business. You might want to take advantage of that.
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I've decided to go with discount solo 401k to set up my after-tax, non-Roth contributions with the primary goal of mega backdoor Roth. Now I'm having trouble deciding if I should set it up through Vanguard or Fidelity. I know that other's have said that Vanguard only uses "pooled accounts", but since I'm only making after-tax contributions, I don't think that it really matters in my situation. I already have Roth IRAs at both Vanguard and Fidelity to periodically roll over the solo 401k. And I would prefer Vanguard just for simplicity since most of my other personal accounts are already there and I like the funds better than Fidelity in general.
The only big difference I see between the two are 1) the process of contributing $ to the solo 401k, and 2) the process of making direct transfers to the Roth IRA.
I believe that you can link a personal bank account to the pooled account at Vanguard (which would be the solo 401 k account), so contributions to the solo 401 k come directly from your personal bank account via ACH. It sounds like Fidelity doesn't have an option for ACH, and your options are to use a business brokerage account or business bank account, mail a check w/form, or personally deliver a check to a Fidelity branch office.
In terms of direct transfers to Roth IRA, Vanguard makes you fill out 2 forms as well as a letter of instruction. I plan on making contributions throughout the year, and would like to make transfers fairly quickly to limit any gains, so having to fill out forms every time seems cumbersome. Do you know if the process is any more streamlined with Fidelity? Curious to hear other people's thoughts and recommendations.
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AFAIK Vanguard doesn't have "non-prototype" accounts and would force you to use their standard (prototypical) plan document, which does not allow after-tax and/or does not allow in-plan conversion (probably both.)
For Fidelity, you can setup bill pay so that contributions are all "electronic" - in the end it goes through as an actual check mailed to Fidelity, but everything from the user end is done online. It just takes a couple days for it to clear (but the same happens if you ACH to a separate account then call in to transfer the money between accounts.) For the actual rollover portion, you are required to fill out a single form (from / to accounts) and mail or hand-deliver it.
I only make contributions every 2-3 months and then do the rollover once it's cleared. I just leave the money in the default cash/core account so it only generates a couple dollars interest over the course of the year, which is not a big deal to pay tax on those gains.
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Someone brought up an interesting comment on Harry Sit's blog and makes me wonder whether it makes sense to maximize the employer deduction, but rather to just throw as much money as possible into the after tax contribution, that in turn is rolled into the Roth.
By deducting the solo 401k employer contribution one is negating the benefit of the 20% QBI business deduction. The QBI deduction shields from federal and state income taxes.
There must be some formula that helps one find just the right amount of employer deduction one can take, and instead of maximizing the employer contribution to the solo 401k, one might want to increase the after-tax contribution to the solo 401k.
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I turned in my Fidelity application for the non-prototype 401k retirement account after receiving my documents from discount solo 401k. I did ask Justin if it was required that I have set up a new bank account for the 401k in the name of the trust with the trust EIN, or can I use my existing personal checking account to make contributions/fund the account? Response was "although it does not need to be a bank account, you will need some type of account in the name of the trust in order to receive 401k contributions. You'll want to hold all trust assets separate from your own assets." Is this your experience as well? To streamline this process a little easier, I was looking at Fidelity's Cash Management Account (as you can open trust account with them) - has anyone used them as their account for the solo 401k?
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I honestly haven't done that. I just move money online from my regular checking account over to my Fidelity Cash Management account.
Then either over the phone or in a Fidelity office I have them move the money from Cash management account over to the non-prototype account.
The non-prototype accounts are in the trust.
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I honestly haven't done that. I just move money online from my regular checking account over to my Fidelity Cash Management account.
Then either over the phone or in a Fidelity office I have them move the money from Cash management account over to the non-prototype account.
The non-prototype accounts are in the trust.
Is your regular checking account titled under your 401k trust? Or is it a personal checking account?
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Personal checking
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I originally did this too but started just doing a bill pay directly from personal checking account into the non-prototype accounts. Those accounts are in the name of the trust which imo fulfills the "account in the name of the trust" portion.
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Yes the non-prototype accounts are definitely in the name of the trust for me as well.
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AFAIK Vanguard doesn't have "non-prototype" accounts and would force you to use their standard (prototypical) plan document, which does not allow after-tax and/or does not allow in-plan conversion (probably both.)
I guess there is a way to do this in Vanguard. I didn't read the whole post, but seems to be a pain from the little I did read - https://www.bogleheads.org/forum/viewtopic.php?p=3954231#p3954231
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That's a great thread Wudged, thanks for including it.
I think Fidelity is a simpler option.
Not aware that Fidelity charges a fee for any account closures.
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I wanted to thank everyone for this thread. I am planning to execute a megabackdoor roth for this year 2019. I will probably be back with tons of questions. This thread has given me the confidence to get started.
Much like Harry at TFB I am a W2 employee that will take the 19k pretax deduction (I have no employer match)
I plan to have around 29k 1099 income
Running the excel sheet at TFB it looks like I will be able to contribute the following with 25% Profit sharing
5722.33 pretax PSP
17167 after tax non roth
A few quick questions
1)Once everything is set up do I have to contribute on a regular basis or can I just do one at the end of the year? (or April 2020 as I won't know what exactly I will earn)
2)Do people use 25% or 20% for profit sharing? I went with 25% as it was the default, and still value pretax more than roth as we are in a high marginal bracket
Thanks!
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You won't really no your true numbers until after 2019 is up and you've had the time to calculate all your business expenses etc.
Be very careful not to over contribute to the 2019 employer profit sharing in the actual 2019 year. There's penalty if you overcontribute and confusing IRS paperwork that I read about.
I think the max calculation states 25% but because there's something quirky about the algebra math, it really is 20%.
So follow the excel spread sheet that Harry provides.
ON the excel spreadsheet Can you adjust the 25% down to a lower % if you want to ?
I believe on your statement that you make to yourself about the contributions that you make, you have to provide your mutual fund allocation percentages.
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Dave thanks so much for all your insight. I still am a bit confused on some of the mechanics so let me lay out for you my understanding and questions.
Step 1) Go to discountsolo401k and sign documents to form the 401k trust
Step 2) Get EIN for the trust
Step 3) Fill out fidelity paperwork for non prototype retirement account, I assume there will be a pretax, roth, and after tax non roth account
Step 4) Use TFB calculator to determine contributions (I plan to do pretax PSP and after tax non roth contribution)
5) Rollover the non tax contribution to Roth IRA
6)Fill out 1099-R
My big questions are as follows:
1)What is the process of transferring funds to Fidelity, reading the thread it seems I can use my personal checking account and send bill pay, but what account does it go to? Does it go to Fidelity cash management plan (separate from the non prototype retirement accounts) and then do I have to call and ask them to send that money to the desired non prototype account?
2)How long does one have to wait to transfer contributions in the after tax non roth 401k to an IRA. (I plan to open at Roth IRA at Fidelity to make it easier)
Thanks
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I followed the exact same steps that you did, and have my solo 401k account now established through Fidelity after going through discountsolo401k. The only difference is that I only created an after-tax non-Roth account (for the prime purpose of mega backdoor Roth). From what discountsolo401k told me, it's preferable to have the account funding the 401k made in the 401k trust's name, and not a personal account that you may already have. So I'm going to open a Fidelity cash management account made in the trust's name. Then I can establish EFTs from my personal account at BOA to make periodic contributions to the cash management account. I do believe that you have to call Fidelity (or go to a local branch) to move money from the cash management account into your 401k. I'll leave the money in the core settlement fund, and likely a couple of days later will fill out the form to transfer the money to a Roth IRA I already have at Fidelity. By transferring cash, will be able to avoid any slight capital gains.
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I just use my personal cash management account at Fidelity to transfer money over to the non-prototype plan accounts.
I'll have to ask Justin about the cash management account issue. He never mentioned that to me before.
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Ok so I am going to open a Fidelity cash management account in the trust's name
I will send money from personal checking---> Fidelity cash management account in trust name
Once I do that, I guess I will have to call fidelity and instruct them over the phone to transfer from cash management into pretax or post tax non roth 401k account.
I plan to contribute to the pretax portion throughout the year (being very cautious on not overfunding), and plan to do the voluntary after tax non roth in one big deposit in 2020 after I close the books.
How long would I have to wait between putting the money in the voluntary after tax account before rolling it over?
Does my plan make sense, or am I missing something?
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Your plan makes sense.
I try to roll over as soon as possible the voluntary after tax contribution account money into the Roth account - or in your case your Roth IRA.
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Thanks, I am going to move forward with this. I'll update on the process.
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Also, maybe Justin sent you an, "In-Plan Roth Conversion Form" which you fill out to yourself.
In it you include your mutual fund percentages, as well as checking the box for " After-tax Voluntary Employee Contribution"
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2018 Numbers
Net Business Profit 61,762
Deductible Self-employment tax 4,363
Adjusted Net Business Profit 57,399
Maximum Profit Sharing 11,480
Employee Compensation 45,919
Employee Salary Deferral - 18,500
Salary Deferral to 403b at day job ** + 2,037
Employer Profit Sharing - 11,480
Employee After Tax Voluntary Contributions 17,976
Since I'm over 50, I'm allowed a $6,000 catch up to the Salary Deferral, so I contributed to the Solo 401k an additional $3,963, totaling $24,500 of salary deferral across all jobs.
The $6,000 catch-up contribution is not included in the annual addition limit. This applies to both the 415c 2018 $55K statutory limit and the 100% of compensation limit.
The annual addition limit specifies that the sum of contributions can't exceed the employee compensation.
The 415c statutory limit specifies a set number that can't be exceeded for all contributions. For 2018 this is 55,000 not including the catch up provision.
For 2019 this is 56,000.
** If instead the $2,037 salary deferral to the 403b at my day job was a $2,037 employer contribution to a 403b plan, then my after tax voluntary contributions would have to be lessened by $2,037. Also, making sure to take some salary deferral at my W-2 job gives me more space for after tax voluntary contributions.
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Thanks for the numbers Dave
Did you contribute throughout the year or all at once?
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I contributed the employee salary deferral throughout 2018, generally in quarterly amounts, and based on the last 2018 paycheck from W-2 job, I was aware how much was put into a 403b, so I could contribute to my max. of 24,500 for 2018
For the employer contribution I only contributed $5,000 in 2018 because I was a bit paranoid about over contributing.
I waited til I had a very full comprehension of business income, which wasn't til 2019, til I contributed to the 2018 employee after tax voluntary contributions.
On another note:
You can make contributions to your individual 401k through a personal cash management account at Fidelity.
The only time that you might need a cash management account that is under the name of your self-employed individual 401k trust is when you are going to transfer existing retirement funds into the solo 401k.
Justin explains, "If your intent is to transfer existing retirement funds into the Solo 401k, then those funds should come from the retirement account and not an account in your name.
Contributions can come from you directly. However, some people have existing retirement funds they want to transfer into a Solo 401k. Some common examples are IRAs and previous employer 401k plans. If you were not making contributions, but were instead trying to transfer an IRA into the plan, for example, then that transfer would not come from an account in your personal name, it would come from an account in the IRA name. I was just trying to give some additional background on instances in which funds would come from other sources."
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That means the bill pay setup from personal bank account for new contributions is fine without having to call into Fidelity and go through the whole rigmarole of transferring money. It's not hard, I just find it incredibly annoying, especially in this day and age, to have to sit on hold, then explain what I'm trying to do, etc.
Also, different scenario I realize, but last time I dropped off the rollover form at Fidelity, the guy there kept trying to explain to me about tax consequences and such, and that I would be receiving a tax form from "them" (He specifically said "them" not Fidelity - no idea who he was even talking about) I just nodded and left as I already know how to handle it, but it just shows that not all the representatives know what's really going on with this type of thing (and understandably so, it's just easier to not have to keep dealing with it over and over)
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Wudged do you mean that your money goes directly from a personal bank account into the non-prototype account without having to deal with the cash management account step ?
Ok I wasn't paying close enough attention earlier in the thread.
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Wudged do you mean that your money goes directly from a personal bank account into the non-prototype account without having to deal with the cash management account step ?
Ok I wasn't paying close enough attention earlier in the thread.
I am interested to know as well, I also don't have the luxury of having a Fidelity office nearby it is 60 miles from me.
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Correct. I do bill pay from my personal checking account outside of Fidelity. I just send 2 different ones for pre tax and after tax, and include the Fidelity account numbers. It takes like 3-4 days instead of bill pay's usual 2 days, then also takes an additional day or so for it to actually clear my bank account, but it's easier imo than sitting on the phone.
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Signed up with discountsolo401k on Friday, awaiting the paperwork today. I will be back to update the process. I am thinking of not converting to roth IRA and using IRR to roth 401k as it may have a little better asset protection and may be easier. I also don't need access to money and could convert to Oh IRA in future after I am done working and wait 5 years.
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So I am confused despite great posts on this in the thread by Dave and Kakashi, but I am filling out the Fidelity application. I realize I have to fill out 3 applications, but I am unsure on how to fill out the Plan Name on the Application.
I have attached a picture of the application
According to 2 fidelity reps/retirement account specialist that is the only place to designate them
I would label them
1)My 401k Trust, Pre-Tax
2)My 401k Trust, Roth
3)My 401k Trust, After Tax Contributions
However Justin at discountsolo401k (who has been fantastic) recommended I keep them all the same (I guess I can go to online portal and nickname them later?- I think Kakashi said this as well)
How did everyone fill out the form specifically?
Thanks
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Sorry here is the pic
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The “Plan Name” field will match the name of your trust. Once you have the accounts open you can give them nicknames in the Fidelity dashboard. That’s what I do and it works fine.
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Ok thanks for the input. I feel silly mailing in 3 of the same exact applications and a 61 page adoption agreement. Going to call to see if I can fax or email if possible as I live far from a Fidelity office
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So I had to mail the entire application and adoption agreement. They are unable to accept fax. I included a letter that tried to explain why there are 3 identical applications, so hopefully everything goes smoothyl.
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Yes there were three applications for the three accounts. It seemed redundant to me too at the time. But the Fidelity staff seem nonplussed by the idea.
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My 3 accounts popped up on my sign in today! I have renamed them. Funding options has the following
Fund your account
Choose the way that works best for you.
1)Transfer from your checking or savings account
2)Transfer from another financial institution
3)Move money from another Fidelity account
4)Fund by check, wire transfer, or direct deposit
Any reason I couldn't fund it with option 2?
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Whatever works. Let us know what you found out.
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Posting to follow. I may be able to do this myself this year. Thanks to everyone for their comments and updates.
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You're welcome Telecaster.
Feel free to add your ideas as you go through the process.
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Options to fund were to mail in check or go to Fidelity branch and turn in check
I attempted bill pay as outline previously. Ill give an update on how it goes. Did Bill pay last Friday evening so don't expect it to post for a little while
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You can also transfer from another financial institution, but it has to be into a completely separate cash account. Then you have to call in (or visit in person) to initiate a transfer into the 401k account(s)
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Bill pay worked just fine, took about a week to fund. I had to call fidelity to ask how to make purchases as it defaulted to their money market account. He was able to set up ability to purchase/trade online for all 3 accounts after about 10 minutes. I bought Total stock index fund without any issues. So far so good.
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Got a reminder email from Justin at DiscountSolo401k that if the 401k assets were worth $250,000 (or more) on Dec. 31st of 2018 then you need to file Form 5500-EZ by July 31st.
Here's the email:
"We're writing to inform you of a 401k compliance deadline on July 31st, 2019. IRS Form 5500-EZ is due by the end of next month for all Solo 401k plans that had $250,000 or more in plan assets on December 31st, 2018. If your plan had less than $250,000 in assets or if you just created your new plan in 2019, you do not need to file form 5500-EZ this year.
Again, Form 5500-EZ is due if your plan was valued at or above $250,000 in 2018. This form is also due if 2018 was your last plan year before terminating.
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
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Employee Deferral Election
Well I need to make a correction about when one has to make the election for salary deferrals to the Solo 401k plan. I thought the election had to be done by Dec. 31st of the year prior to the tax year for which one was making these contributions. But instead it really is Dec. 31st of the actual year for which you are contributing.
There's a thread in Bogleheads.org that goes into this in more detail
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=285717&sid=c0e93a28b597182cd947bc62cd1565bc
"Spirit Rider wrote: ↑
Fri Sep 06, 2019 5:09 pm
An employee deferral election is just that. You must complete an election specifying how and at what rate by 12/31. This is not reported to the IRS, only retained in your records. For the self-employed the actual contribution may occur anytime from 1/1 of the current year -> the tax filing deadline including extensions. However the deferral contributions must match the election.
knightrider wrote:
Thanks. So if I understand correctly an "election" is just some kind of notice of intent done before 12/31. Then the actual contribution can occur until tax deadline?
Spirit Rider wrote
It is more that an intent. It is an actual commitment that you can change up until 12/31, then it becomes binding. It must be deterministic based on your compensation and 401k employee elective contribution rules. For example, a percentage of your compensation, a fixed periodic amount, etc... It can not exceed 100% of your compensation or your remaining employee elective contribution limit.
knightrider wrote:
I don't anticipate doing this separately. Will probably do my "election" and contribution the same time. And I assume this "election" is something you do online in Fidelity?
Spirit Rider wrote:
You generally should do an election as soon as your know what it will be so you don't forget. You can always change it later, but no later than 12/31. There is no way to do this online at Fidelity. This has nothing to do with them. You complete it and retain it in your records.
There is no IRS form for this Fidelity has a sample Fidelity Retirement Plan—401(k) Salary Reduction Agreement ( https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/401k-salary-reduction-agreement.pdf ) that they use for all their 401k plans. It is not ideal for self-employed individuals, because it assumes you are a W-2 employee with pay periods. However, you can edit it to suit your purposes. For example, you could change "amount per pay period" to "amount per quarter" or select "a one-time deferral contribution of.""
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Upshot: 12,000 of savings was essentially put into a Roth - because my business income has enough space for it.
I easily filed the 1099-R with the IRS today using the website www.tax1099.com - it was only $2.90
And filing with the IRS automatically includes filing with Michigan.
The $12,000 I put in the after-tax contribution sub account had $1 of earnings so I had to take that into account for my 1099.
I followed Harry Sit's blog on how to fill out the 1099-R https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html
On the 1099-R
Line 1: 12,001
Line 2a: 1
Line 5: 12,000
Line 7: Code G
Just a reminder that January 31st is the deadline to submit the 1099-R to the IRS. This 1099-R is for the transfer of money that occurred in the calendar year 2019 from your aftertax account to the Roth (Roth401K or RothIRA).
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Any idea how to file a form 5500ez efile method?
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I haven't done it before, but looks like it is fairly easy according to this post https://thefinancebuff.com/form-5500ez-for-your-solo-401k.html
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I'm having a little issue with my 1099-R. I filled it out as described on TFB:
Box 1 7588
Box 2a 3
Box 5 7585
Box 7 G
but when I enter it into freetaxusa it tells me "You entered $3 as the amount of taxable pension distribution in Box 2a of the Retirement Income (Form 1099-R) screen. The taxable pension distribution in Box 2a of the Retirement Income (Form 1099-R) screen should not include the part of your distribution that was converted to a Roth IRA. Otherwise the taxable pension amount from the Roth IRA conversion will be double counted as income. Please go back to the Retirement Income (Form 1099-R) screen and reduce the amount in Box 2a by the amount converted from your qualified retirement plan to a Roth IRA."
I'm confused on this because the money was sitting in the after tax account long enough to generate $3 and I think I've filled this out just like others have but for some reason FreetaxUSA doesn't like this. Has anyone else had this issue?
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I'm confused by that too and I don't understand it. It might be worth going to bogleheads.org and asking SpiritRider or TFB
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I went ahead and emailed FreeTaxUSA and they said it was because after tax contributions are unusual so their software is confused by it. In case anyone else needs it this is the work around they gave me and it worked fine:
1. First, go to the Income tab and select the Retirement Income option.
2. Then on that screen, click to Edit your 1099-R that is in question.
3. Then on the Retirement Income (Form 1099-R) screen change your taxable amount on the 1099-R entry in Box 2a to be ZERO ($0) and report the remainder of your 1099-R as is was reported to you. Don't worry we will report that $3 of earnings elsewhere to show it as taxable.
4. Then click to Save and Continue.
5. On the next screen (Roth Conversion) you would still answer YES as you already have to both questions and enter the amount of your distribution from Box 1 of your 1099-R (currently you show $7,588) as you already have in the field. Then Save and Continue.
6. The next screen should be the After-Tax Roth Conversion screen. You will enter the amount of your "basis" in the Roth Conversion in this screen. In your case, you will need to adjust the suggested amount in bold to be less the $3 of earnings (which would be probably $7,585). Then click to Save and Continue.
NEXT there will be a screen (Retirement Income Information Alerts (Form 1099-R)) with a Yellow Alert. That yellow alert is correct and should state that your only taxable income on that rollover will be the $3 of earnings.
You can just Continue through that alert screen and proceed with the remainder of your return. Then if/when you finish your Federal entries and get to the Summary tab you can pull up and review a copy of your return. On it you should then see for Line 4c and 4d that your Rolled over amount is the amount from Box 1 of your 1099-R ($7,588 if that was the correct amount on the form) and the taxable amount of only $3 for the earnings.
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So should I assume that your 1099-R filing is free with FreeTaxUSA ?
I pay $2.90 with tax1099.com
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So should I assume that your 1099-R filing is free with FreeTaxUSA ?
I pay $2.90 with tax1099.com
FreeTaxUSA is indeed free but I use it for filing my 1040. I don't think they have the ability to generate 1099s. I use tax1099.com for 1099s and pay the same fee.
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Just a reminder of the importance of the rules for Filing 5500
This from a Bogleheads post:
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=301627#p4978058
"There are two Form 5500-EZ filing requirements:
When a one-participant 401k plan balance (including all accounts) exceeds $250K on the last day of the businesses year. It must file a Form 5500-EZ by the last day of the 7th month following the last day of the businesses year. For a calendar year business, those dates are 12/31 and 7/31 respectively.
When a one-participant 401k plan is terminated. The plan sponsor must file a final Form 5500-EZ on the last day of the 7th month following the plan termination. This is true regardless, even if the plan has never had a plan balance > $250K.
Unfortunately, @smileartist is almost 60 days late with filing their final For 5500-EZ.
Two silver linings for @smileartist:
The increase to $250/day for late filing only applies to returns required to be filed after 12/31/19. Since their filing deadline was 11/30/19, 60 days late would only be 60 * $25 = $1,500 and no $15,000.
However, if the Form 5500-EZ late-filers penalty relief program is still the same, then the cost would only be $500.
Also can anyone answer SouthernDoc's question:
"One final question...
If you establish a plan's own EIN, for line 2b you still list the employer's/sole proprietor's EIN and not the plan EIN, correct? As in, there is no section on the 5500-EZ to report the plan's own EIN."
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2019 calculations
W2- $19,000 employee pre tax contribution
1099 net income: $41,870.92
25% pretax PSP $8,262
Post tax non roth $24,786
I am ready to contibute to post tax non roth, and I would like to do IRR to solo401k ASAP after. I am uncertain of the mechnics on how to do this at fidelity. I know I can write a check to deposit to the after tax non roth account, but how do I go about rolling it over. I don't see online options. Do people call in? Thanks for any advice.
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I use this form https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/non-prototype-retirement-account-withdrawal.pdf
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Sometimes I just call Fidelity and they do it over the phone.
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Thanks for the info david and wudged,
I called in to talk with fidelity and they said just to call to do it, but its nice to have that form as a resource.
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Here is an eloquent response by Harry Sit in the Finance Buff blog regarding the oddity of how employer contributions will lower the amount of eligible after-tax contributions.
https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html#comment-25310
saildawg says
FEBRUARY 7, 2020 AT 10:16 AM
Harry,
Thank you so much for the articles and calculator. I do not quite understand all the nuances, but the calculator has given me the confidence to go forward. In playing with the numbers it seems that on 50k 1099 earnings total contributions are actually larger if I use 0% PSP vs 25% (note 19k employee contribution from W2 with wages $250,000)
For 0% I get $0 PSP + 49,330 after tax non roth = 49,330 total
For 25% I get 9,866 in PSP + 29,598 in after tax non roth =39,464 total
I am going to use 25% as I am in a high marginal tax bracket so PSP is more valuable, but was hoping to understand why there is a difference. Thanks for everything.
Harry Sit says
FEBRUARY 8, 2020 AT 2:18 PM
From the business’s point of view, after it makes the profit sharing contribution, the rest is paid to the owner as compensation. The rule says the total contribution of all types (elective deferral + profit sharing + after-tax) can’t exceed the compensation. Because profit sharing is on both sides of the equation, $1 in profit sharing reduces after-tax contribution by $2.
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Hi all!
In 2018, we established an i401k with DiscountSolo401k and use Schwab for our CRA's. We're overdue for our first conversion of after-tax funds and I'm hoping for a quick thumbs up/down on my first conversion.
We have funds segregated into pre-tax elective, pre-tax profit sharing, post-tax (not roth) CRA's.
We have reason to want to convert (in-kind transfer) all of the funds/positions at once, as follows:
* Both Pre-Tax accounts to Rollover IRA at Schwab.
* Post-Tax to Roth IRA at Schwab.
My wife, the owner of the business and accounts, only has Roth IRA's otherwise. There are no existing TIRA's/SIMPLE's/SEP's in her name though there are in mine.
My interpretation is that because all funds are rolled over from the i401k at once to similarly taxed accounts, there is no ambiguity of tax treatment.
To execute this, we will document the request from my wife to the 401k trust. Acting on behalf of the trust, she will issue a Letter of Authorization requesteing Schwab to transfer the funds (e.g. CRA to Rollover IRA). Again acting be behalf of the trust, she will also issue 3 1099-R's reflecting the rollover to herself and the IRS. 2 of the 1099-R's will reflect no tax liability for the pre-tax funds moving to Rollover IRAs. The 3rd 1099-R will reflect a few dollars of tax liability from interest accrued on the after-tax funds.
In the near future, we will be rolling these funds from Roth and Rollover IRA's to Merrill Edge for unrelated reasons. We may, in the future, roll just the Rollover IRA funds back into the i401k Pre-Tax CRA (e.g. loan capabilities, standard backdoor roth ira positioning). That may be a year out. In the meantime, we'll slowly build the i401k account back up with new 2019 and 2020 funds.
All good?
Thanks! Excited and a little nervous about getting this all just right!
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Can you contact Justin at DiscountSolo401k to let him know of your plans.
I'm sure you can roll over the after tax to the Roth IRA. Others on here are doing just that.
I'm not certain of the pre-tax rollover to the traditional IRA.
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2018 Numbers
Net Business Profit 61,762
Deductible Self-employment tax 4,363
Adjusted Net Business Profit 57,399
Maximum Profit Sharing 11,480
Employee Compensation 45,919
Employee Salary Deferral - 18,500
Salary Deferral to 403b at day job ** + 2,037
Employer Profit Sharing - 11,480
Employee After Tax Voluntary Contributions 17,976
Since I'm over 50, I'm allowed a $6,000 catch up to the Salary Deferral, so I contributed to the Solo 401k an additional $3,963, totaling $24,500 of salary deferral across all jobs.
The $6,000 catch-up contribution is not included in the annual addition limit. This applies to both the 415c 2018 $55K statutory limit and the 100% of compensation limit.
The annual addition limit specifies that the sum of contributions can't exceed the employee compensation.
The 415c statutory limit specifies a set number that can't be exceeded for all contributions. For 2018 this is 55,000 not including the catch up provision.
For 2019 this is 56,000.
** If instead the $2,037 salary deferral to the 403b at my day job was a $2,037 employer contribution to a 403b plan, then my after tax voluntary contributions would have to be lessened by $2,037. Also, making sure to take some salary deferral at my W-2 job gives me more space for after tax voluntary contributions.
2019 Numbers
Net Business Profit 54,635
Deductible Self-employment tax 3,860
Adjusted Net Business Profit 50,755
Maximum Profit Sharing will not take it this year
Employee Compensation 50,755
Employee Salary Deferral - 19,000
Salary Deferral to 403b at day job ** + 1,963
Employer Profit Sharing - 0
Employee Salary Deferral Catchup provision -6,000
Employee After Tax Voluntary Contributions 27,738
As it turns out my federal income taxes are already zero after taking the employee salary deferral into account.
So it makes no sense for me to contribute to the employer profit sharing, as it only saves me a state tax rate of about 4%.
So instead I will be contributing more to the after tax voluntary contributions which will get rolled over into the roth.
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Has anybody rolled an old employer sponsored 401k into the pre-tax account at Fidelity (with the standard http://discountsolo401k.com/ template) ?
I'm curious the best way to do it - contact Fidelity and let them handle it, get a distribution check from the employer 401k and just deposit it myself as a 60 day rollover, .. ?
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I would first want to try to get Fidelity to do it.
But maybe Justin at DiscountSolo401k can answer that question.
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I contacted him after posting here and he said it's probably better to contact the other custodian first to initiate, since Fidelity doesn't administer the solo 401k.
I got side tracked by some other issues though, which I may or may not detail here later, so haven't started the process just yet, which I do plan to detail here how it goes.
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From my research so far, all the 3rd party solo 401k providers seem to make you do your own record keeping. on every contribution, transfer, distribution, etc, I feel would be a nightmare for me. how do you guys handle this?
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Just keep a spreadsheet with date, amount, type of transaction, account.
Limit number of transactions to keep it easier - eg do quarterly/semi-annual instead of monthly/semi-monthly.
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I'm just a sole proprietor, not an S corporation. So I don't have to deal with making paychecks weekly from which a portion is contributed to the Solo 401k.
I can just do a lump sum, once or twice a year.
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Upshot: 12,000 of savings was essentially put into a Roth - because my business income has enough space for it.
I easily filed the 1099-R with the IRS today using the website www.tax1099.com - it was only $2.90
And filing with the IRS automatically includes filing with Michigan.
The $12,000 I put in the after-tax contribution sub account had $1 of earnings so I had to take that into account for my 1099.
I followed Harry Sit's blog on how to fill out the 1099-R https://thefinancebuff.com/executing-mega-backdoor-roth-in-solo-401k.html
On the 1099-R
Line 1: 12,001
Line 2a: 1
Line 5: 12,000
Line 7: Code G
Just a reminder that January 31st is the deadline to submit the 1099-R to the IRS. This 1099-R is for the transfer of money that occurred in the calendar year 2019 from your aftertax account to the Roth (Roth401K or RothIRA).
Just a reminder that January 31st is the deadline to submit the 1099-R to the IRS.
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I contacted him after posting here and he said it's probably better to contact the other custodian first to initiate, since Fidelity doesn't administer the solo 401k.
I got side tracked by some other issues though, which I may or may not detail here later, so haven't started the process just yet, which I do plan to detail here how it goes.
Well this took quite a while but as I mentioned, I got sidetracked - posted about it here: https://forum.mrmoneymustache.com/share-your-badassity/vesting-win/
Anyway, all I did was call up the custodian of the 401k from my previous employer and have them cut me a check made out to "FMTC FBO (my name)" which they mailed to my address. Then I put my Fidelity non-prototype pre-tax account number in the memo area, dropped it off, and it was deposited to my account before the day was over.
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Just a very important public service announcement about the July 31st deadline to file Form 5500 if the plan assets are above $250k on Dec. 31st 2021. I just efiled my form. Definitely use the .pdf instructions that Discount Solo provides for you.
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Hm, I read somewhere (Harry Sit / Finance Buff?) that paper is much easier than e-filing, and from Discount Solo 401k, the only document I can find is "Cover Letter.pdf" which gives directions for the paper form as well.
Have they started sending out new documents for this? Around this time last year I got some updated documents, but none of them seem to include anything about the 5500.
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Ah, I see this site allows electronic submission!
https://www.efast.dol.gov/welcome.html
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Ah, I see this site allows electronic submission!
https://www.efast.dol.gov/welcome.html
LOL woops, I posted about this forever ago!
I haven't done it before, but looks like it is fairly easy according to this post https://thefinancebuff.com/form-5500ez-for-your-solo-401k.html