Anyone Execute a mega backdoor roth in solo 401k ?

[DavidAnnArbor]

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.

[wudged]

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.

[DavidAnnArbor]

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?

[DavidAnnArbor]

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."

[deeppizza]

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. 

[Kakashi]

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.

[DavidAnnArbor]

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.

[deeppizza]

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). 

[DavidAnnArbor]

Keep in mind you're allowed a separate employer deduction for your self employment business. You might want to take advantage of that.

[deeppizza]

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.

[wudged]

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.

[DavidAnnArbor]

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.

[deeppizza]

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?

[DavidAnnArbor]

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.

[deeppizza]

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?

[DavidAnnArbor]

Personal checking

[wudged]

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.

[DavidAnnArbor]

Yes the non-prototype accounts are definitely in the name of the trust for me as well.

[wudged]

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

[DavidAnnArbor]

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.

[saildawg]

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!

[DavidAnnArbor]

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.

[saildawg]

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

[deeppizza]

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.

[DavidAnnArbor]

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.

[saildawg]

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?

[DavidAnnArbor]

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.

[saildawg]

Thanks, I am going to move forward with this.  I'll update on the process.

[DavidAnnArbor]

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"

[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.


 

[saildawg]

Thanks for the numbers Dave
Did you contribute throughout the year or all at once?

[DavidAnnArbor]

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."

[wudged]

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)

[DavidAnnArbor]

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.

[saildawg]

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.

[wudged]

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.

[saildawg]

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.

[saildawg]

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

[saildawg]

Sorry here is the pic

[protostache]

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.

[saildawg]

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

[saildawg]

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.

[DavidAnnArbor]

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.

[saildawg]

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?

[DavidAnnArbor]

Whatever works. Let us know what you found out.

[Telecaster]

Posting to follow.  I may be able to do this myself this year.   Thanks to everyone for their comments and updates. 

[DavidAnnArbor]

You're welcome Telecaster.
Feel free to add your ideas as you go through the process.

[saildawg]

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

[wudged]

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)

[saildawg]

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.