Anyone Execute a mega backdoor roth in solo 401k ?

[DavidAnnArbor]

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

[DavidAnnArbor]

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.""

[DavidAnnArbor]

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).

[Kakashi]

Any idea how to file a form 5500ez efile method?

[wudged]

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

[pbradley0]

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?

[DavidAnnArbor]

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

[pbradley0]

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.

[DavidAnnArbor]

So should I assume that your 1099-R filing is free with FreeTaxUSA ?

I pay $2.90 with tax1099.com

[pbradley0]

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.

[DavidAnnArbor]

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."

[saildawg]

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.

[wudged]

I use this form https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/non-prototype-retirement-account-withdrawal.pdf

[DavidAnnArbor]

Sometimes I just call Fidelity and they do it over the phone.

[saildawg]

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.

[DavidAnnArbor]

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.

[CoffeeAndDonuts]

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!

[DavidAnnArbor]

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. 

[DavidAnnArbor]

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.

[wudged]

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, .. ?

[DavidAnnArbor]

I would first want to try to get Fidelity to do it.
But maybe Justin at DiscountSolo401k can answer that question.

[wudged]

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.

[Ben B]

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?

[wudged]

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.

[DavidAnnArbor]

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.

[DavidAnnArbor]

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.

[wudged]

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.

[DavidAnnArbor]

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.

[wudged]

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.

[wudged]

Ah, I see this site allows electronic submission!

https://www.efast.dol.gov/welcome.html

[wudged]

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