Backdoor Roth conversion in same year as maxing out traditional 401k?

[Satin Shoestring]

Hello Tax Gurus,

I am self-employed and taxed as an S-Corp. I have no employees.

I expect to be in the 28% bracket this year if I am still single and filing single by 12/31/17.

My CPA told me to do the following. She's pretty savvy, and I read up on FI and run everything by her, but I want to make sure that I am doing the maximum hack by running it by this wise group.

The steps she outlined for me are:

1. Contribute $5,500 to my Traditional Solo 401(k). This Trad account already has money in it.
2. Immediately roll that $5,500 into my Roth Solo 401(k). That Roth account already has money in it.
3. Make $18,000 of employee contributions to that same Traditional Solo 401(k).
4. At the end of 2017, make my employer matching contribution of 25% of my reasonable salary to my Traditional Solo 401(k).

Is this all right to do it this way all in one year?

Thank you.

[terran]

Steps 1 and 2 sound like they should be happening with traditional IRA and roth IRA as the limits match and that would be a regular backdoor roth contribution. See https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

[Satin Shoestring]

Steps 1 and 2 sound like they should be happening with traditional IRA and roth IRA as the limits match and that would be a regular backdoor roth contribution. See https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Thank you for the link. What is the practical difference to me if the Solo 401k accounts are used instead of IRA accounts?

[terran]

There are similar things that a 401k can do (it's called a mega backdoor roth), but no off the shelf solo 401k providers allow the types of things required (after tax -- not roth -- contributions and in service rollovers or withdrawals), so you would need to have a self managed solo 401k to do it. Assuming your solo 401k is provided by fidelity, vanguard, td ameritrade, etrade, etc then the practical difference is that you just won't be able to do it.

If you want money in a roth 401k, then just put it straight in as there are no income requirements. Not all providers allow roth contributions. The $18k limit is shared between roth and traditional though, and profit sharing can only go into traditional.

Anyone can do a regular backdoor roth utilizing IRAs. This is only useful because there are income limits for roth IRA contributions, and for deductible IRA contributions, but not for non-deductible IRA contributions. Non-deductible contributions aren't very useful except in as much as they can be rolled over into a roth. Hence the contributing and rolling over machinations instead of just contributing straight to a roth IRA as lower income folks can.

[Satin Shoestring]

Thank you - I should clarify that my accounts are not with any brokerage you listed. They are elsewhere. They can do the rollover between 401k accounts. My question is, will I get taxed on the full balance of the existing traditional 401k account into which my $5500 contribution shall be made, when I roll $5500 into the Roth? So let's pretend I have $20k already in the traditional 401k. That money was from prior tax years. Will I be taxed on $25,500 in 2017?

[terran]

Yes, you will be taxed on the rollover. I wouldn't do it unless you expect to be in a higher tax bracket in retirement.

The backdoor roth contributions (which I think is what your accountant is actually suggesting) are advantageous because they let you get money into a roth that would otherwise have to stay in a regular taxable account. In your tax bracket making traditional contributions, and keeping them there is most likely the better option (again, unless you expect your retirement tax bracket to be higher).

[MDM]

1. Contribute $5,500 to my Traditional Solo 401(k). This Trad account already has money in it.
3. Make $18,000 of employee contributions to that same Traditional Solo 401(k).

Is this all right to do...in one year?

No.

Unless you are age 50+. 

Otherwise your 401k contribution is limited to $18K.  See Solo 401(k) plan - Bogleheads and 401.

As terran has mentioned, the answer may be different if you are talking about a traditional IRA in step 1 and the 401k in step 3.