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Roth catch up contributions
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7 Replies
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When making an after tax Roth catch up contributions (over 50 and making over $150K), I can deposit directly into my Roth 401K account at Fidelity from my business account? I don’t need to deposit into the voluntary after tax account and then transfer into the Roth 401K account? That process is only for making mega backdoor contributions?
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My understanding is the following: Yes, catch-up contributions can come right from your business account. And no, they should not go through your voluntary after-tax account first.
Technically catch-up contributions are considered employee deferrals and therefore if you are making catch-up contributions you need at least the catch-up amount as employee deferrals. If you are asking about 2025 and trying to max out, it may be that it doesn’t matter depending on how much you had for employee deferrals already. If you have specific numbers for employee deferrals and VAT and company contribution it could make the explanation easier.
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Or, here’s a simpler consideration if the following fits your goals and situation:
If you are trying to have everything or almost everything be Roth and you’ve already contributed some employee deferrals as Roth and you have or will contribute to your VAT (typically for a mega backdoor Roth), as long as your employee deferrals are at least as much as what you wanted to contribute as catch-up contributions you can contribute whatever else you want to (of course within prescribed limits) via the VAT and what was already contributed to your employee deferral (or at least the catch-up amount) will be considered your catch-up contribution.
I sounds confusing, but it is pretty straight-forward once you conceptualize it correctly.
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Is this really accurate? I was under the impression that the ability to make catch-up contributions required first contributing the max non-catchup $$ into a voluntary employee account.
(Newbie here, but have done some research).
And elsewhere in the various blog posts, I have read that the catch-up contribution amount is on top of the 70k limit for all contributions. This would seem to exceed the maximum allowed amount under section 415?
Thanks, -Bill
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Catch-up contributions are a bit of an unusual beast. You may notice that you don’t ever even have to designate any particular amount as catch-up when making the contributions. Catch-up contributions actually only become such once you have contributed over a statutory limit (e.g. the employee deferrals limit or the employee compensation limit or the total $70k contribution limit or whatever it is this year). But according to regulations catch-up has to be from employee deferrals.
So, in answer to your first question, I was under the impression that the ability to make catch-up contributions required first contributing the max non-catchup $$ into a voluntary employee account. No, you don’t have to have maxed employee deferrals first, but your employee deferrals need to amount to at least as much as your catch-up.
As for your second question: I have read that the catch-up contribution amount is on top of the 70k limit for all contributions. This would seem to exceed the maximum allowed amount under section 415? Yes, catch-up contributions can exceed the $70k limit as well as catch-up can exceed your compensation. Both of those are statutory limits but the definition of the catch-up contributions is basically that you are allowed to contribute the catch-up amount in excess of the statutory limits (including the Sec. 415 limits).
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Interesting Galen! Thanks for the clarifications. What about this situation:
sole proprietor, over 65, 1099NEC = $20,000 and assume no business expenses are deducted.
My normal limit for employee deferral would be $18,587 according to the online calculator. Since I haven’t hit the statutory $23,500 yet, I assume that I’m not eligible for any part of the $7500 catch-up, i.e. I’m limited by my income (first year of contract work)? The calculator at http://www.mysolo401k.net/solo-401k/solo-401k-annual-contribution-calculator says that $18,587 is my maximum solo401k contribution.
PS: the calculator shows that $21,641 could be contributed to a SIMPLE IRA. That’s also confusing, but not the focus for me.
-Bill
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Well, I don’t get into the weeds as much in the sole proprietor area, but here’s my take:
I assume the $18,587 is really equal to $20k less 1/2 of the SS/Medicare tax (that is, the business-paid portion). That makes $18,587 analogous to an S-corp gross wage. Therefore that is the statutory limit for what can be contributed. But since catch-up contributions can go beyond that you are still eligible for the $7500 catch-up contribution for a total of $26,087 contributed to your 401(k).
However, how you contribute it starts to matter. Technically since you can’t “defer” from your income more than you make (meaning you can’t have $26087 “deferred” when your income was only $18587) you have to rely on other avenues. [Note, I don’t know if this is actually enforced because it really is just a shell game at this point, but those truly in the know say what I’ve just described is true and since it isn’t hard to be compliant I figure we should be.] So, employee deferrals could be $18587 or as low as $7500 and the other avenues can make sure your totals get to $26087. For example you could have employee deferrals of $18587 and have VAT contributions of $7500. Or employee deferrals of $$7500 and VAT contributions of $18587, or basically anything in-between. You could also throw employer deferrals in the mix as well. The key is that the total can be $18587 + $7500 and with whatever mix works best as long as at least $7500 comes as employee deferrals. And just to be clear, when I say employee deferrals I’m meaning either pre-tax or Roth direct contributions that are analogous to employee deferrals from an S-corp (I’m not sure if they’re called something different with a sole proprietor business) and this does not include employer contributions (profit sharing) nor does it include VAT.
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Correct as Roth solo 401k contributions (both employer Roth and employee Roth) are required to be deposited to the Roth solo 401k brokerage account. Only if you were processing a mega backdoor Roth solo 401k conversion, would you need to first deposit the voluntary after-tax solo 401k funds to the voluntary after-tax solo 401k brokerage account and then convert those voluntary after-tax solo 401k funds to the Roth solo 401k brokerage account. To learn more about the separate holding accounts for the solo 401k, click here.
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