Harvard Law Attorney George Blower reviews the 2021 & 2022 Mega Backdoor Roth Solo 401k Self-Directed Solo 401k Contribution Limits & Types for self-employed businesses taxed as Partnership, Multi-Member LLC (1065/K-1)

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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 $58,000 (or even $64,500 if you are 50 or older) for 2021 (for 2022: $61k or $67.5 if you are 50 or older).

-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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2021/2022 Mega Backdoor Roth Solo 401k Contributions-Partnership/Multi-Member LLC (1065/K-1)

The Mega Backdoor Roth Solo 401k contributions have become increasingly popular among self-employed individuals and small business owners. This unique strategy allows individuals to contribute large amounts of after-tax income to their retirement savings, potentially maximizing tax advantages.

While traditionally this strategy was used by individuals with a single-member LLC or a sole proprietorship, recent developments have made it possible for those involved in a partnership or multi-member LLC to take advantage of the Mega Backdoor Roth strategy as well.

The Mega Backdoor Roth Solo 401k contributions involve several steps, but when executed correctly, they can provide significant tax benefits and accelerate retirement savings. Here’s a breakdown of how this strategy works for partnership and multi-member LLC members:

1. Establish a Solo 401k: Each partner or LLC member must establish a Solo 401k plan specifically for their self-employment income. This plan allows for larger contribution limits compared to traditional IRAs or employer-sponsored 401(k) plans.

2. Elect to Apply Profit Sharing: The partnership or multi-member LLC must amend its operating agreement or partnership agreement to allow for profit-sharing contributions to be allocated specifically to each partner or member’s Solo 401k.

3. Make After-Tax Contributions: Each partner or member can contribute after-tax income to their Solo 401k, up to the annual contribution limits set by the IRS. For 2021, the contribution limit is $58,000 or $64,500 for individuals age 50 or older. These contributions are reported on Schedule K-1 of Form 1065, the partnership tax return.

4. Conversion to a Roth: Once the after-tax contributions are made, the next step involves converting those funds into a Roth account within the Solo 401k. This conversion is tax-free if done correctly, as the contributions were already made with after-tax income.

5. Reporting the Mega Backdoor Roth Contributions: Each partner or LLC member should report the conversion of after-tax contributions to their Solo 401k on their personal tax return using Form 8606. This form ensures that the tax-free nature of the conversion is properly accounted for.

By following these steps, partnership and multi-member LLC members can benefit from the advantages of the Mega Backdoor Roth Solo 401k contributions. This strategy allows for substantial after-tax contributions to be converted into a Roth account, which grows tax-free and can be withdrawn in retirement without incurring taxes.

It’s important to consult with a tax professional or financial advisor to ensure the proper execution of the Mega Backdoor Roth Solo 401k contributions strategy. They can help navigate any complexities and ensure compliance with IRS regulations.

In conclusion, the 2021/2022 Mega Backdoor Roth Solo 401k contributions are not limited to individuals with single-member LLCs or sole proprietorships. Partnership and multi-member LLC members can also take advantage of this strategy to maximize their retirement savings and potentially reduce their tax burden. By carefully following the steps and seeking professional guidance, individuals can reap the benefits of this powerful retirement savings tool.