Mega Backdoor Roth FAQ – Do I have to make Roth Solo 401k First Before After tax Solo 401k contributions?
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Mega Backdoor Roth FAQ – Do I make Roth Solo 401k First Before After tax Solo 401k contributions?
If you’re self-employed or a small business owner, you may be considering opening a Solo 401(k) plan to save for retirement. While the traditional and Roth options for Solo 401(k)s are fairly straightforward, the concept of making after-tax contributions to your Solo 401(k) and then converting those funds to a Roth account can be a bit more complex. In this article, we’ll answer the question of whether you should make Roth Solo 401(k) contributions before or after making after-tax contributions to your Solo 401(k).
The Mega Backdoor Roth strategy involves making after-tax contributions to your Solo 401(k) and then converting those contributions to a Roth account. This can be a great way to supercharge your retirement savings, as Roth accounts offer tax-free growth and withdrawals in retirement. However, in order to execute the Mega Backdoor Roth strategy, you must understand the order in which you should make your contributions.
The general consensus among financial experts is that you should first make your Roth Solo 401(k) contributions before making after-tax contributions to your Solo 401(k). This is because Roth contributions are made with after-tax dollars and can grow tax-free, making them a more attractive option for retirement savings.
Once you have maxed out your Roth Solo 401(k) contributions, you can then begin making after-tax contributions to your Solo 401(k). These after-tax contributions can then be converted to a Roth account through a process known as an in-plan Roth rollover, allowing you to take advantage of the tax-free growth and withdrawals that Roth accounts offer.
It’s important to note that not all Solo 401(k) plans allow for after-tax contributions or in-plan Roth rollovers, so you’ll need to check with your plan provider to ensure that these options are available to you. Additionally, you’ll want to consult with a financial advisor or tax professional before executing the Mega Backdoor Roth strategy, as the tax implications can be complex.
In conclusion, when it comes to making Roth Solo 401(k) contributions and after-tax contributions to your Solo 401(k), it’s generally recommended that you prioritize your Roth contributions first. Once you’ve maxed out your Roth contributions, you can then consider making after-tax contributions and converting them to a Roth account through an in-plan Roth rollover. As always, be sure to seek professional advice before implementing any retirement savings strategy.
I’m surprised more people don’t talk about the voluntary after-tax first strategy. It can give you many months to decide if you want to do Pre-Tax vs Roth for a given year.
To understand correctly, you're saying contributions to the Roth do not first have to go into the After Tax account, and then roll it over to the Roth account? It can be deposited strait into the Roth account? …. but 1099-R would still need to be completed?