Am I qualified for the voluntary after-tax contribution and backdoor ROTH?5 Replies
Top ForumsMega Backdoor Roth Solo 401kAugust 1, 2022 at 1:11 pm
I read the following quote from your posting at https://mysolo401k.net/mycommunity/your-ultimate-guide-to-the-backdoor-roth-and-how-to-contribute-to-yours/ :
“Deductible/Pre-Tax Contributions — Whether made to your employer-sponsored plan account or your traditional IRA, you did not pay taxes on the money used to make these contributions. If you have balances in your traditional IRA that include deductible/pre-tax contributions, you won’t be able to make a backdoor Roth IRA contribution.”
I do have T-IRA’s transferred from my old 401K accounts. Is it a problem for my backdoor conversion?
Top ForumsSolo 401k, Solo 401k ContributionsAugust 1, 2022 at 1:24 pm
Thank you for posting your good question!
This confirms that the fact that a Solo 401k owner has pre-tax funds in an IRA won’t prevent such a person from making voluntary after-tax solo 401k contributions and then converting such funds to a Roth IRA (subject to the Solo 401k contribution limits, deadlines, etc.). See an example here: https://www.mysolo401k.net/solo-401k/how-to-process-a-fidelity-investments-conversion-of-voluntary-after-tax-solo-401k-funds-non-prototype-account-to-a-fidelity-roth-ira/
This is because the pro-rata rules apply differently to a backdoor Roth IRA conversion vs. a Mega Backdoor Roth Solo 401k.
Top ForumsMega Backdoor Roth Solo 401kAugust 8, 2022 at 2:17 pm
George, thanks for the reply. Now that I am qualified to a backdoor ROTH conversion, I’d like to know that since I already have my current Solo 401K (before and after tax accounts) at E*Trade, and another ROTH IRA account at Fidelity, which brokerage should I choose as custodian for my new Solo 401K ? If I choose E*Trade, do I keep the current accounts with them, or need to close them and re-open 3 new accounts through your firm?
Any other pros and cons between E*Trade and Fidelity?
Top ForumsSolo 401k, Solo 401k ContributionsAugust 9, 2022 at 11:25 am
Thanks for your follow-up post.
Please note that E-Trade no longer supports after-tax solo 401k contributions/accounts which is how one makes Mega Backdoor Roth Solo 401k contributions. See: https://www.mysolo401k.net/alert-etrade-solo-401k-stops-support-for-mega-backdoor-roth-solo-401k-what-are-your-options/
Someone with such a solo 401k at E-Trade can continue to maintain the ability to make Mega Backdoor Roth Solo 401k contributions can simply re-state their plan to our plan. https://www.mysolo401k.net/etrade-solo-401k-restatement-review-how-to-change-to-a-self-directed-solo-401k/
As part of the restatement process, new accounts need to be set up for the restated solo 401k plan. Such new accounts can be at E-Trade or a different brokerage such as Fidelity.
Some may prefer to open such new accounts at E-Trade (e.g. because they are already familiar with E-Trade’s website, etc.).
One advantage of opening the new accounts at Fidelity will be to make it easy to transfer voluntary after-tax contributions to a Roth IRA at Fidelity. See: https://www.mysolo401k.net/solo-401k/how-to-process-a-fidelity-investments-conversion-of-voluntary-after-tax-solo-401k-funds-non-prototype-account-to-a-fidelity-roth-ira/
Top ForumsMega Backdoor Roth Solo 401kAugust 14, 2022 at 4:31 pm
Thanks George. If I choose to open my new accounts and keep E-Trade as the custodian (to keep my current investment as is), can I transfer my voluntary after-tax contribution to my current ROTH IRA at Fidelity? Or is it better for me to open another ROTH IRA at E-trade for the backdoor conversion?
I remembrer the after-tax contribution needs to come out of my W-2 pay instead of the S-corp distribution? In that case do I need to make sure my W-2 is high enough to cover my Federral and State taxes, my employee 401K contribution, etc, before I can contribute the balance to after-tax 401K?
Top ForumsSolo 401k, Solo 401k ContributionsAugust 16, 2022 at 2:58 am
1) It is certainly acceptable from a Solo 401k perspective to transfer funds from a voluntary after-tax Solo 401k sub-account at E-TRADE to a Roth IRA at another brokerage (e.g. Fidelity).
2) Please note that making Solo 401k contributions doesn’t reduce one’s obligation to pay payroll taxes (so if not paid from the account of one’s self-employed business, such taxes would need to be paid with other funds).
3) Please note that one is not required to first make employee contributions (salary deferrals) before making voluntary after-tax contributions. Of course, if one chooses to make salary deferrals this will reduce the amount of voluntary after-tax contributions that may be made. For example, the voluntary after-tax contribution limit is equal to 100% of the self-employment compensation (i.e. w-2 wages from a self-employed business taxed as an S-corp) not to exceed the overall limit ($61k for 2022) and reduced by any employee or employer Solo 401k contributions.
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