Harvard Law Attorney George Blower provides an in-depth review of the mechanics of a Mega Backdoor Roth Solo 401k for a self-employed business taxed as an S-corporation.
We will review:
-Contribution Limits, Deadlines & How to Report
-Contribution Scenarios
-Convert to Roth Solo 401k vs Roth IRA
-Many other topics
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The solo 401k plan, commonly referred to as self-directed Solo 41k is the retirement plan of choice for self-employed individuals or owner-only businesses including for the features highlighted below:
-The highest contribution limits for any defined contribution plan including up to $57,000 (or even $63,500 if you are 50 or older) for 2020.
-The ability to make pre-tax, Roth, and even Mega Backdoor Roth contributions.
-401k participant loans of up to $50,000
-Invest with checkbook control in real estate, cryptocurrencies, notes, private placements, and other types of alternative investments.
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For over 10 years, My Solo 401k Financial is the leading self-directed solo 401k provider having helped over 8,000 clients take control over their retirement funds by focusing on superior knowledge, expertise, and customer service with over 100+ 5-star verified customer reviews on the Better Business Bureau (BBB)….(read more)
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As a small business owner with an S-corporation, you may be looking for ways to save for retirement while minimizing your tax burden. One option to consider is the Mega Backdoor Roth Solo 401k, a retirement savings strategy that allows for larger contributions to a Roth 401k than a standard individual 401k.
What is a Mega Backdoor Roth Solo 401k?
A Mega Backdoor Roth Solo 401k is a strategy that allows high-earning business owners to contribute significantly more to their Roth 401k account than the annual contribution limit. With a standard individual 401k, you are limited to contributing up to $19,500 per year ($26,000 if you are over age 50) plus an employer match of up to 25% of your compensation.
However, with a Mega Backdoor Roth Solo 401k, the plan allows for after-tax contributions up to a certain limit (currently $58,000 per year for those under age 50, or $64,500 for those over age 50). You can then convert those after-tax contributions to a Roth 401k account, where all future growth is tax-free.
Why would you want to use this strategy?
There are several benefits to consider:
1. Tax-free growth: By contributing to a Roth 401k account, all future growth and distributions will be tax-free, making it an attractive option for those looking to minimize their tax burden in retirement.
2. Higher contribution limit: With the Mega Backdoor Roth Solo 401k, you can contribute significantly more than the annual limit of a standard individual 401k, allowing you to save more for retirement.
3. The ability to save more if you’re over 50: For those over the age of 50, catch-up contributions allow you to save even more.
4. Timing flexibility: Unlike with a traditional Roth IRA, there are no income limits affecting eligibility to contribute, nor are there any distribution requirements. The latter is particularly relevant for tax planning decisions if you plan to retire early.
How to set up a Mega Backdoor Roth Solo 401k
Setting up a Mega Backdoor Roth Solo 401k can be complicated and requires the assistance of a qualified professional. Here are the main steps:
1. Establish an S-corp: To participate in a Solo 401k, you must first establish an S-corporation.
2. Set up the Solo 401k plan: Once you have established an S-corporation, you can set up a Solo 401k plan that includes after-tax contributions.
3. Make traditional and after-tax contributions to the plan: After the plan is established, you can make both traditional and after-tax contributions, up to the limits mentioned earlier.
4. Convert after-tax contributions to the Roth 401k account: Once you have contributed after-tax dollars, you can then convert them to a Roth 401k account.
It’s important to work with a financial advisor or qualified professional to set up and manage your Solo 401k plan, including the Mega Backdoor Roth strategy.
In conclusion, the Mega Backdoor Roth Solo 401k can be an attractive option for high-earning business owners looking to save more for retirement while minimizing their tax burden. However, the strategy is complicated and requires the assistance of a qualified professional. If you are interested in this strategy, we recommend speaking to a financial advisor or tax professional who can guide you through the process.
If I have an S-corp that I take a W-2 of 50k a year, is it too late to open a solo 401k and do mega backdoor of 50k for tax year 2022? After setting up a plan and accounts can I cut a check for the full amount prior to March 15th, do the after tax to Roth conversation and have the mega backdoor count for 2022?
May I pay employer contributions up to the 25% of W-2 limit to employee account and afterwards immediately convert to Roth portions of 401k?
I thought I heard you say in this presentation that I can take a loan from my ROTH 401k. Is that right? And the limit now would be 50K – is that right? And how does the rate of interest get set for the loan?
I make a full Roth 401(k) contribution to my solo 401(k), $19,500. As an S Corp, I pay myself employer contribution, profit-sharing, 25% of my W-2 income. I just heard about Mega Backdoor Roth 401(k). First, paying a voluntary after-tax contribution immediately after converting to the Roth portion of the 401(k) up to the remaining portion of defined contributions maximum, $57,000. May I also contribute to traditional IRA, afterward rollover to pretax 401(k), then immediately convert it to the Roth 401(k). How do I calculate the maximum amount I can contribute to both? I know the max I can contribute is earned income, which is my W-2 wages. What really confuses me is, since I pay myself employer contribution, it eats some of the voluntary after-tax contributions but never paid it from my W-2. Let's do a hypothetical for 2020 if I have $50,000 in W-2 income, which means I have a Roth contribution of $19,500, an employer contribution of $12,500, and remaining contributed as voluntary after-tax is $25,000. HOW MUCH CAN I CONTRIBUTE TO A TRADITIONAL IRA? Is that (1) $6,000, I am below 50 years old, or (2) $5,500 because combined Roth contribution, voluntary after-tax, and traditional IRA must be less than equal to my W-2 wages of $50,000, or (3) $0 because combined 401(k) contribution eat up my entire $50,000?
I have a 401(k) trust through your company. Since we are talking about Mega Backdoor Roth Solo 401(k), after maxing that out, may I contribute to a traditional IRA of 6,000 dollars, then the first rollover to pretax 401(k) afterward, finally rollover to Roth Solo 401(k)? Does your trust document allow this? Would you be issuing 1099r for the Roth conversion? I know the conversion would be as of the year it is converted, which now be for 2021, but can I make a 2020 IRA contribution and 2020 voluntary aftertax contributions now if I had enough W-2 income last year?
How does this apply for a S-COPR business receiving income from capital gain? Such as Day trading as a business under S-COPR. THX
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