Author Topic: Mega Backdoor Roth IRA + SoloK  (Read 2439 times)

mr_orange

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Mega Backdoor Roth IRA + SoloK
« on: June 25, 2015, 06:44:50 PM »
After doing some snooping around on the internet today and reading through previous threads on this subject I found this article today:

http://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

Our income situation is roughly as follows:
-W2 Income For Me From Employer: $110k
-W2 Income For Wife: $95k
-"Side Business" income for 2015: Likely ~$400k (Line 17 of 1040)

The business income comes from an S-corp.  My wife is a 50% owner in this business and is completely passive.  Thus this passive income can be offset with passive losses from depreciation of our property, other business expenses, etc.   Our current tax situation is such that taking the income as earned income from our business is NOT efficient for 2015.  Our taxes are far lower taking the income on Line 17 of the 1040 as S-corp income, which is apparently broken out on Schedule E. 

I don't think there is much room for us to do anything to reduce our taxable income in 2015 much.  My main secondary goal is to use after-tax income to funnel it to the Roth bucket of our SoloK to help with future taxes.  Is there any way to do this conceptually without studying our SoloK documents?  I can copy/paste sections from the document later in the thread if someone can explain how to get the money into the plan somehow. 

Since our business doesn't want to convert the dollars to earned income from the business profits can I use my W2 income from my job as a contribution to the business somehow and use this earned income to count toward our $53k limit instead?  If not, is there any other way to make this work? 

chucklesmcgee

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Re: Mega Backdoor Roth IRA + SoloK
« Reply #1 on: June 25, 2015, 09:59:00 PM »
From what you've stated, I don't think there's much for you to reduce your taxable 2015 income either. An HSA through, say, HSA bank can help you deduct a little more if you have a high-deductible plan.

I don't quite understand your question regarding Roth 401k contributions. You pay yourself (or your wife) as an employee through your S-corporation. You can then elect to make a payroll deduction and contribute to your Solo 401k in a designated Roth contribution. Your corporation can also make matching contributions which must be traditional. All of these are subject to whatever limits are in place (what is it, no more than 25% of income, not to exceed $X?). This may require you pay additional payroll, which may not be tax-efficient for you.

mr_orange

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Re: Mega Backdoor Roth IRA + SoloK
« Reply #2 on: June 26, 2015, 04:32:47 AM »
I don't quite understand your question regarding Roth 401k contributions. You pay yourself (or your wife) as an employee through your S-corporation. You can then elect to make a payroll deduction and contribute to your Solo 401k in a designated Roth contribution. Your corporation can also make matching contributions which must be traditional. All of these are subject to whatever limits are in place (what is it, no more than 25% of income, not to exceed $X?). This may require you pay additional payroll, which may not be tax-efficient for you.

I'm not a tax wizard so hopefully I am saying this correctly.  We set up a "consulting company" to take a 1099 from our operations entity so we wouldn't have to do payroll earlier this year.  That is how we were going to recognize the profits as earned income.  I'd have to read through the documents to know what the limits are, but 25% for the profits portion seems to be what the limit is by the rules.  Thus we'd need to make 4X $106k if we both max out our $53k; or $424k.  We may or may not make it in 2015, but we should be close. 

Our FICA taxes max out at $118.5k in 2015 from my understanding.  So there wouldn't be much to pay there because our W2 jobs already consume a lot of FICA up to this limit.  The issue, I am told, is that having to declare the income as earned income instead of Line 17 (Schedule E?) income on our 1040 doesn't allow us to offset 50% of our passive gains with passive losses.  Thus the act of having to declare this income as earned income apparently increases our taxes. 

I started a separate thread about this on Bogleheads and apparently the SoloK employer profit share contribution is an expense of the s-corp.  I'm struggling to understand why the SoloK won't help me given that this contribution can be expensed.  I'll keep digging into that, but I was hoping someone could think of a way to get more money into my SoloK or some other Roth bucket without needing to declare the business income as earned income and presumably increasing my 2015 taxes.  The "regular backdoor Roth IRA" seems to be an option.  I'm just hoping to be able to contribute in excess of $11k ($5500 *2) in 2015 using the backdoor methods. 

waffle

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Re: Mega Backdoor Roth IRA + SoloK
« Reply #3 on: June 26, 2015, 09:01:43 AM »
Why are you even still working? 400k in passive income a year? You must really love your job...

mr_orange

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Re: Mega Backdoor Roth IRA + SoloK
« Reply #4 on: June 26, 2015, 09:38:12 AM »
The money isn't in the bank yet ;-)

chucklesmcgee

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Re: Mega Backdoor Roth IRA + SoloK
« Reply #5 on: June 26, 2015, 10:33:58 PM »
I'll keep digging into that, but I was hoping someone could think of a way to get more money into my SoloK or some other Roth bucket without needing to declare the business income as earned income and presumably increasing my 2015 taxes.

Your 401k contributions are fundamentally limited by your salary, pretty much no way around that. Now, you are aware you can convert employer non-Roth contributions to Roth contributions, yes? Tax consequences are just the same as if you converted a non-Roth IRA to and IRA, you need to pay taxes on it. This is all hairy and I'd really suggest talking to a competent financial professional.