Self-employed 401k FAQ – How to upgrade Fidelity Solo 401k to Mega Backdoor Roth Solo 401k?

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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 $61,000 (or even $67,500 if you are 50 or older) for 2022, or $66,000 (or even $73,500 if you are 50 or older) for 2023.

-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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Self-employed individuals have the advantage of being able to set up their own retirement savings plan, known as a Solo 401(k). This allows them to save for retirement while also taking advantage of tax benefits. One popular provider of Solo 401(k) plans is Fidelity, but some self-employed individuals may want to upgrade their plan to a Mega Backdoor Roth Solo 401(k) in order to maximize their contributions and potential tax benefits.

What is a Mega Backdoor Roth Solo 401(k)?

A Mega Backdoor Roth Solo 401(k) is a type of retirement savings plan that allows self-employed individuals to make after-tax contributions to their plan and convert them into a Roth IRA within the same plan. This strategy allows for larger contributions than a traditional Roth IRA or Solo 401(k) plan, and can be a powerful tool for retirement savings.

How to upgrade Fidelity Solo 401(k) to Mega Backdoor Roth Solo 401(k)?

Upgrading your Fidelity Solo 401(k) to a Mega Backdoor Roth Solo 401(k) involves a few key steps:

1. Check if your plan allows for after-tax contributions: Before making any changes to your plan, it’s important to confirm that your Fidelity Solo 401(k) plan allows for after-tax contributions. Some plans may not offer this option, so be sure to check with your plan administrator.

2. Increase your contributions: If your plan does allow for after-tax contributions, you will need to increase your contributions to take advantage of the Mega Backdoor Roth strategy. The IRS limit for total contributions to a Solo 401(k) in 2021 is $58,000, so make sure you are contributing as much as possible to maximize your savings.

3. Convert after-tax contributions to Roth IRA: Once you have made after-tax contributions to your Solo 401(k), you can convert them to a Roth IRA within the same plan. This may involve filling out some paperwork with Fidelity or working with a financial advisor to complete the conversion.

4. Monitor your investments: As with any retirement savings plan, it’s important to regularly monitor your investments and make adjustments as needed. Keep track of your contributions, conversions, and overall portfolio performance to ensure you are on track to meet your retirement goals.

In conclusion, upgrading your Fidelity Solo 401(k) to a Mega Backdoor Roth Solo 401(k) can be a smart strategy for self-employed individuals looking to maximize their retirement savings. By making after-tax contributions and converting them to a Roth IRA within the same plan, you can take advantage of potentially greater tax benefits and larger contribution limits. Be sure to check with your plan administrator and monitor your investments to ensure you are on track to meet your retirement goals.