Can I make 100% After-Tax Solo 401k Contributions (Mega Backdoor Roth)?

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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 (for 2021: $58k or $64.5 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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If you’re self-employed or a sole proprietor, you may have heard of the Solo 401k. One question that often comes up is whether you can make 100% after-tax contributions to your Solo 401k. These contributions are also known as Mega Backdoor Roth contributions.

First, let’s break down what these terms mean. After-tax contributions are money that you contribute to your Solo 401k after you’ve paid income taxes on it. Unlike traditional pre-tax contributions, after-tax contributions are not deductible on your tax return. However, they can grow tax-free as long as they are held in the account.

The Mega Backdoor Roth refers to a strategy that allows you to convert your after-tax contributions to a Roth IRA. This can be a powerful way to build tax-free retirement savings.

So, can you make 100% after-tax contributions to your Solo 401k? The answer is: it depends on your plan. Not all Solo 401k plans offer this option. You’ll need to check with your plan administrator or custodian to see if it’s available to you.

Assuming your plan does allow after-tax contributions, there are a few things you need to be aware of. The first is that there is a limit to how much you can contribute per year. In 2021, the limit is $58,000 if you’re under age 50 and $64,500 if you’re 50 or older. This includes all contributions – both pre-tax and after-tax – as well as any employer contributions.

The second thing to keep in mind is that not all plans allow for in-service distributions. An in-service distribution is when you can take money out of your Solo 401k while you’re still working. This is important because in order to convert your after-tax contributions to a Roth IRA, you’ll need to take an in-service distribution and roll the money over to a Roth IRA.

Assuming your plan does allow for in-service distributions, you can take the after-tax contributions and roll them over to a Roth IRA. This will trigger income taxes on the amount you convert, but once the money is in the Roth IRA, it can grow tax-free for as long as you hold it.

In summary, making 100% after-tax contributions to your Solo 401k is possible, but it depends on your plan. If your plan allows for it, you can use the Mega Backdoor Roth strategy to build tax-free retirement savings. Be sure to check with your plan administrator or custodian to see if this option is available to you.