Solo-401k options if no after-tax contributions in Wife's 401k?

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BusterMcTaco
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Joined: Tue Jul 11, 2017 6:36 pm

Solo-401k options if no after-tax contributions in Wife's 401k?

Postby BusterMcTaco » Fri Jul 14, 2017 12:20 am

Hello,
Short-time lurker, first time poster :P

I’m self-employed (LLC) with a steady stream of contract revenue that’s growing significantly. I anticipate my EBIT will be about $280k this year and grow approximately $40k year-over-year for the immediate future. Beyond 3-5 years who knows, but at least for now it seems to be reliable recurring contract revenue. My wife makes $150k at her salaried job.

It’s time to open a retirement plan for myself and start saving. Our finances are such that we are able to max out all retirement accounts in an ideal world, but alas, my wife’s 401k does not allow after-tax contributions.

With that said, here’s the current situation:

Me: $220k in old 401k, $96k in rollover IRA (for which I’m kicking myself for now), $6k in Roth IRA
Her: $80k in old 401k, $20k in current 401k with employer matching 4.5% up to max (so $4500/year).

I had a brilliant plan of opening a solo-401k with E*Trade (flexible on brokerage), rolling my traditional IRA into it, and opening the door for backdoor Roth conversions and a mega backdoor Roth conversion via her 401k, but as mentioned, after-tax contributions aren’t allowed in her plan. So with that out the window, I find myself wondering if it’s possible to add her to my payroll or as a part-owner (which would actually be a legitimate thing to do, I just never bothered paying her before because why bother?) and then letting her do after-tax contributions into the solo-401k. I understand from reading other threads that no off-the-shelf solo 401k offers after-tax contributions and in-service rollover, and one of my questions is if it’s possible and worth it to get a custom plan document drafted with a TPA, such that we can still do this. In short, plan is:

Me:
*Solo 401k with $18k employee/$36k employer contributions
*$5500 Roth backdoor
Her:
*$22.5k (with match) employee contribution to 401k.
*$5500 Roth backdoor
*$31.5k mega Roth backdoor if it can be worked out

Obviously the last item is a lot of money so if it can be done, I’d like to do it. I can’t justify (or afford) paying her enough to make a full $36k employer contribution for her, but in the absence of the above option, could still pay her whatever is reasonable and contribute 25% of that.

My questions:
1) Is there an off-the-shelf solo 401k plan that will allow her to contribute after-tax money I pay her?
2) If not off-the-shelf, has anyone used a TPA to arrange such a thing? How does that work in terms of which brokerage I can use?
2b) If so, which brokerage do you recommend? I like Vanguard funds due to low ER (and obvious popularity on these forums), but I understand that the Admirals Shares aren’t available in the 401k. Still, other Vanguard funds are essentially (or literally) free in Vanguard, but would cost me a transaction fee in E*Trade.
3) Am I missing any gotchas that would prevent me from doing the rollover IRA rollover (again) into the solo 401k plan, then doing a Roth backdoor with $5500 each, at least?
4) Given that we’re at 33%+9.3% tax bracket (although we hit AMT so it’s more of a 28% federal tax bracket), and aim to retire with a minimum $120k/year (not counting inflation) of post-tax spending money (i.e. not particularly lower tax bracket even with today’s laws), is it a reasonable plan to make my $18k/year employee contributions as Roth contributions?
4b) If I start with Roth contributions in my solo-401k and later want to switch to pre-tax contributions, is that going to be possible or a problem?

Thank you for any advice!

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby Spirit Rider » Fri Jul 14, 2017 9:23 am

BusterMcTaco wrote:My questions:
1) Is there an off-the-shelf solo 401k plan that will allow her to contribute after-tax money I pay her?
2) If not off-the-shelf, has anyone used a TPA to arrange such a thing? How does that work in terms of which brokerage I can use?
2b) If so, which brokerage do you recommend? I like Vanguard funds due to low ER (and obvious popularity on these forums), but I understand that the Admirals Shares aren’t available in the 401k. Still, other Vanguard funds are essentially (or literally) free in Vanguard, but would cost me a transaction fee in E*Trade.
3) Am I missing any gotchas that would prevent me from doing the rollover IRA rollover (again) into the solo 401k plan, then doing a Roth backdoor with $5500 each, at least?
4) Given that we’re at 33%+9.3% tax bracket (although we hit AMT so it’s more of a 28% federal tax bracket), and aim to retire with a minimum $120k/year (not counting inflation) of post-tax spending money (i.e. not particularly lower tax bracket even with today’s laws), is it a reasonable plan to make my $18k/year employee contributions as Roth contributions?
4b) If I start with Roth contributions in my solo-401k and later want to switch to pre-tax contributions, is that going to be possible or a problem?

  1. Not to my knowledge
    1. While some TPAs will only use a single brokerage as custodian, others will allow you to select the custodian.
    2. I would suggest Fidelity. They allow allow separate accounts per employee and even per sub account type. Vanguard now only allows "pooled" accounts, which is one account per 401k. Record keeping would be needed to track the individual employees/sub accounts.
  2. No, there should be no problem rolling over your IRA to the one-participant 401k. You just need to be aware that a one-participant 401k with >= $250K in assets on 12/31 each year must file IRS Form 5500-EZ by 7/31 of the following year. There are significant penalties for late filing/failure to file. Note: This is true of any one-participant 401k.
  3. At your federal/state marginal tax rates, Designated Roth 401k contributions do not make sense. You use Backdoor Roth and Mega Backdoor Roth contributions, because they are "additional" tax advantaged retirement space.
If you do your own tax returns or at least feel comfortable understanding each entry, there is potentially a lower cost option for a one-participant 401k that allows after-tax contributions.

Our very own The Finance Buff (AKA tfb) has a couple of posts in his website about how to do this yourself. This first post Mega Backdoor Roth In Solo 401k: Control Your Own Destiny is about setting up your own one-participant plan and the second post Executing Mega Backdoor Roth In Solo 401k is one year later that goes into detail about filing the required 1099-R for the after-tax roll over from the one-participant 401k to the Roth IRA.

Basic Steps:
  1. Use Ascensus for 401k plan document $195/year. Note: Ascensus provides the plan document and TPA services for the small business 401k marketed by Vanguard.
  2. Complete adoption agreement effective 1/1/2017. This will allow the entire year's net self-employment income to be used as a basis for the employer contributions. Fill out, sign, date and save for your records an employee deferral election.
  3. Use Fidleity's Investment Only Accounts. Their Premium Class index fund expense ratios are generally the same as Vanguard's Admiral shares.
  4. Act as administrator/trustee to make your employee deferrals/employer contributions and your wife's employer contributions/after-tax contributions.
  5. Perform rollover(s) to Roth IRA.
  6. After year end complete and submit IRS Form 1099-R and if entire one-participant 401k year end balance (both spouses) >= 250K. Which it will be if you rollover your $220K IRA + your $54K employee/employer contributions + your wife's $30K+ after-tax contribution.
  7. I recommend following tfb's suggestion and have a TPA fill out the Form 1099-R and Form 5500-EZ at least the first year. Then if you feel comfortable enough follow the example and fill them out yourself.

ERISA Stone
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Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby ERISA Stone » Fri Jul 14, 2017 9:33 am

The LLC makes it a little more difficult to control the income for you, but you could consider lowering your income and increasing hers for your company so that you both make enough to max out pre-tax sources in the solo(k). My wife and I operate a business together and when we had a solo(k), our compensation was set at a level to be able to max out the retirement plan. It's a little different because your wife already maxes her 401(k) space at her employer. However, you could set her compensation at $144k, and give her a 25% profit sharing contribution. She would have $36k in your plan and $18k at her other job.

That would still leave $18k of room for employer contributions in your plan for her, but I don't know how much you would be willing to contribute to her as you are limited to 25% of eligible compensation (plus approximately 20% of net income for LLCs).

So if she had eligible compensation of $144k, and you had the same, you could put away ($36k for spouse + $54K for you) $90k in your solok.

This comes with all the caveats that your wife must be a legitimate employee of your company, and receive compensation comparable to the same position at another firm.

Also, I'm not an accountant, but you might consider speaking to one to see if it would be advantageous for your firm to be taxed as an S-corp.

ETA: I missed that you might not be able to do the full $36k. If that's the case, then set her compensation at a level that allows you to make the profit sharing contribution you can afford.

You and your spouse have a lot of income. If I were in your shoes, I would be looking to find ways to maximize the pre-tax space rather than focus on after-tax contributions.

BusterMcTaco
Posts: 15
Joined: Tue Jul 11, 2017 6:36 pm

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby BusterMcTaco » Fri Jul 14, 2017 3:32 pm

Spirit Rider wrote:I would suggest Fidelity. They allow allow separate accounts per employee and even per sub account type. Vanguard now only allows "pooled" accounts, which is one account per 401k. Record keeping would be needed to track the individual employees/sub accounts.


Do I understand correctly that with Vanguard we'd still be allowed $54k each, but have to keep careful records of who deposited what and when, what was purchased, cost basis, etc? That does sound like a PITA.

ERISA Stone wrote:You and your spouse have a lot of income. If I were in your shoes, I would be looking to find ways to maximize the pre-tax space rather than focus on after-tax contributions.


Spirit Rider wrote:At your federal/state marginal tax rates, Designated Roth 401k contributions do not make sense. You use Backdoor Roth and Mega Backdoor Roth contributions, because they are "additional" tax advantaged retirement space.


OK. My thought was that Roth is effectively "more money" because it's already after-tax, and we can afford the taxes. Even if reinvesting the pre-tax savings, using this calculator, I come up with Roth as an advantage: http://www.bankrate.com/calculators/ret ... lator.aspx

Parameters:
Current age: 34
Retirement age: 60
Annual contribution: $18,000
Both options checked
Return: 7%
Current tax rate: 33%
Retirement tax rate: 28%

I get Roth advantage by about $60k.

If I factor in state (42.3%/37.3% total), it goes to a $130k advantage. I have to drop the retirement rate to 28% (with current rate at 42.3%) to break even. I apologize if it sounds like I'm asking for advice and then disregarding it, which is not my intention. I guess what I'm asking is... is this calculator misleading?

If you do your own tax returns or at least feel comfortable understanding each entry, there is potentially a lower cost option for a one-participant 401k that allows after-tax contributions.

Our very own The Finance Buff (AKA tfb) has a couple of posts in his website about how to do this yourself. This first post Mega Backdoor Roth In Solo 401k: Control Your Own Destiny is about setting up your own one-participant plan and the second post Executing Mega Backdoor Roth In Solo 401k is one year later that goes into detail about filing the required 1099-R for the after-tax roll over from the one-participant 401k to the Roth IRA.
[*]I recommend following tfb's suggestion and have a TPA fill out the Form 1099-R and Form 5500-EZ at least the first year. Then if you feel comfortable enough follow the example and fill them out yourself.


I do my own tax returns, so I could consider this. This is what I meant by using a TPA, for a plan document more than actually administration. I definitely think paying for someone else to do the forms the first year is a good call, though.

  • Use Ascensus for 401k plan document $195/year. Note: Ascensus provides the plan document and TPA services for the small business 401k marketed by Vanguard.
  • Use Fidleity's Investment Only Accounts. Their Premium Class index fund expense ratios are generally the same as Vanguard's Admiral shares.


So can I use Fidelity if using Ascensus, or do I have to use Vanguard?

Point Fidelity:
  • Lower ER, which around 10 basis points savings is probably more important than Roth versus pre-tax.
  • Sub-accounts.
Point Vanguard:
  • Roth 401k option. Or is this possible in Fidelity with a custom plan document?
  • Generally preferred on these forums, although perhaps not important if the Premium Class index funds are just as good.

ERISA Stone wrote:The LLC makes it a little more difficult to control the income for you, but you could consider lowering your income and increasing hers for your company so that you both make enough to max out pre-tax sources in the solo(k). My wife and I operate a business together and when we had a solo(k), our compensation was set at a level to be able to max out the retirement plan. It's a little different because your wife already maxes her 401(k) space at her employer. However, you could set her compensation at $144k, and give her a 25% profit sharing contribution. She would have $36k in your plan and $18k at her other job.
ETA: I missed that you might not be able to do the full $36k. If that's the case, then set her compensation at a level that allows you to make the profit sharing contribution you can afford.


Yeah, as you noted, I cannot justify paying her $144k. However, perhaps I can make her a 50% owner and that way she gets half the dividends? We'd both be above $144k next year. This year, unless I'm able to backdate it, not so much... but better half for her than nothing! I haven't looked into this at all but can't imagine that a 50/50 ownership between husband and wife would be illegal or unethical.

That would still leave $18k of room for employer contributions in your plan for her, but I don't know how much you would be willing to contribute to her as you are limited to 25% of eligible compensation (plus approximately 20% of net income for LLCs).


She caps out 401k at her other job and actually gets about $4500 in matching, so no employer contribution option remaining. In fact, I think her employer contribution at her other job would limit mine to $31,500, or $126,000 of her compensation. Or is it 20% instead of 25% if she's a partner instead of an employee? Have to look into that, too.

Also, I'm not an accountant, but you might consider speaking to one to see if it would be advantageous for your firm to be taxed as an S-corp.


I'm going to solicit recommendations in the San Francisco area. I don't think an S-corp will help too much though because:
  • I can't justify paying myself less salary than the SS cap.
  • My wife would be entirely past SS cap due to her W-2 compensation.
  • This might complicate or invalidate my idea of 50/50 ownership for dividends purposes. If it doesn't though, it solves a lot of problems as my wife's half would be entirely Medicare-exempt (she wouldn't draw a salary as an owner, or a nominal one for services actually rendered).
  • California has a 1.5% S-corp tax which wipes out most of the savings on Medicare. For the 1.4% that leaves (I think) tax savings on dividends as opposed to salary, it's not really worth the overhead. Maybe once EBIT grows more, though.

ERISA Stone
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Joined: Tue Jun 24, 2014 8:54 am

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby ERISA Stone » Fri Jul 14, 2017 4:40 pm

Regarding the retirement plan discussion, there are a few limits in play:

1. 402(g) Limit - 100% of compensation up to $18k ($24k if over age 50). This is the employEE deferral limit (excludes nonRoth aftertax conributions). The 18k is an individual limit and is spread across ALL retirement plans in which the individual participates.

2. 415 Annual Additions Limit - 100% of compensation up to $54k. A participant has this limit for EACH plan he belongs to, as long as the companies aren't related. Assuming your company and your wife's employer aren't related, your wife would have up to a $54k limit for each plan. Keep in mind that she only has one limit from #1, so if you maxed her out at $54k in your plan, it would have to be 100% employer contributions (or aftertax) and she would have to make at least $54k.

3. 404 Maximum Deductible Limit - for sole proprietors, this is essentially 20% of earned income. See this IRS link for a calculation example https://www.irs.gov/retirement-plans/se ... -deduction. If your wife is a W-2 employee, there would be an additional 25% of her compensation considered. This limit only includes employER contributions. EmployEE deferrals are not included.

You don't generally need to maintain cost basis for a 401k plan. You may have to separate earnings/contributions/distributions on an annual basis, but that's an easy calculation for solo(k)s.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby Spirit Rider » Fri Jul 14, 2017 5:39 pm

BusterMcTaco wrote:
Spirit Rider wrote:Do I understand correctly that with Vanguard we'd still be allowed $54k each, but have to keep careful records of who deposited what and when, what was purchased, cost basis, etc? That does sound like a PITA.

That is correct. You would have to track contributions/earnings of who, when, what and where (which sub account). You will have to track this regardless for after-tax contributions.

So can I use Fidelity if using Ascensus, or do I have to use Vanguard?

In this case, Ascensus is only the plan document provider. You can invest with any investment custodian that accepts and provides investment only accounts in such a scenario.

Point Fidelity:
  • Lower ER, which around 10 basis points savings is probably more important than Roth versus pre-tax.
  • Sub-accounts.
Point Vanguard:
  • Roth 401k option. Or is this possible in Fidelity with a custom plan document?
  • Generally preferred on these forums, although perhaps not important if the Premium Class index funds are just as good.

Since this is your own one-participant 401k, you can utilize separate traditional pre-tax, Roth post-tax and after-tax sub accounts regardless of who the custodian is, as long as the 401k plan/adoption agreement supports those features.

Yeah, as you noted, I cannot justify paying her $144k. However, perhaps I can make her a 50% owner and that way she gets half the dividends? We'd both be above $144k next year. This year, unless I'm able to backdate it, not so much... but better half for her than nothing! I haven't looked into this at all but can't imagine that a 50/50 ownership between husband and wife would be illegal or unethical.

I'm going to solicit recommendations in the San Francisco area.

Actually, there are several ways to legally have a 50:50 joint ownership, S-Corp, Partnership and Qualified Joint Venture (QJV). Normally, you can not have a QJV with an LLC, except... in a community property state. A QJV is ideal for your situation. It allows you to allocate the business income/deductions between spouses. To elect QJV status each spouse simply files their own Schedule C and Schedule SE using the allocated amounts.

Your wife would only need to "materially participate" in the business. This is a relatively easy benchmark to obtain. For example, one qualification is for your wife to work more than 100 hours in the activity during the year, and no one else works more than she does. So if your wife spends more that 100 hours/year on say administrative tasks (accounting, record keeping, one participant 401k administration, etc...) and you spend less time than her on these tasks, she materially participates and you can split the income/deductions 50:50. Kind of sounds like the IRS invented this for you doesn't it.

You would each end up with your own net self-employment income (net business profit - 1/2 SE tax) to be the basis for your one-participant 401k contributions.

P.S. (backdating) That is the beauty of QJV. You elect it at tax filing time simply by each spouse filing a pro-rated Schedule C and Schedule SE. It then it is then effective for the entire tax year. Note: The spouse still needs to meet the yearly material participation requirements after the beginning of work. The 100 hours will still not be that hard, you just need to start her working and documenting her work tasks/time.

P.P.S. If you select the effective date to be 1/1/17 on the one-participant 401k adoption agreement as I suggested previously, This brings the entire year's net self-employment income available for both spouses employer contributions. This helps with ERISA Stones' recommendation to to maximize pre-tax contributions. Then you can both do after-tax contributions for the remainder of the $54K. Since by splitting the net-self-employment income between you you may no longer maximizing your $54K with just employee deferrals/employer contributions. However, this allows the maximum total employer contributions to the plan.

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Earl Lemongrab
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Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby Earl Lemongrab » Sun Jul 16, 2017 12:53 pm

Vanguard doesn't normally allow rollover into their individual 401(k)s. They also don't allow Admiral or ETF shares. I don't know if any of that changes if you devise your own plan.
This week's fortune cookie: "You will enjoy doing something spontaneous this weekend." Apparently that meant working on a dead PC, but I didn't enjoy that much.

BusterMcTaco
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Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby BusterMcTaco » Tue Jul 18, 2017 4:19 pm

These are amazingly helpful responses. Thank you so much.

ERISA Stone wrote:1. 402(g) Limit - 100% of compensation up to $18k ($24k if over age 50). This is the employEE deferral limit (excludes nonRoth aftertax conributions). The 18k is an individual limit and is spread across ALL retirement plans in which the individual participates.


She hits this with her other employer, plus it turns out $6,000 pre-tax matching.

ERISA Stone wrote:2. 415 Annual Additions Limit - 100% of compensation up to $54k. A participant has this limit for EACH plan he belongs to, as long as the companies aren't related. Assuming your company and your wife's employer aren't related, your wife would have up to a $54k limit for each plan. Keep in mind that she only has one limit from #1, so if you maxed her out at $54k in your plan, it would have to be 100% employer contributions (or aftertax) and she would have to make at least $54k.


So she could put another $30,000 post-tax into her other employer if allowed (the ideal solution), or actually up to $54,000 post-tax in mine? Or rather, as much pre-tax employer contribution as eligible, then the rest post-tax (as allowable by her income from the business).

ERISA Stone wrote:3. 404 Maximum Deductible Limit - for sole proprietors, this is essentially 20% of earned income. See this IRS link for a calculation example https://www.irs.gov/retirement-plans/se ... -deduction. If your wife is a W-2 employee, there would be an additional 25% of her compensation considered. This limit only includes employER contributions. EmployEE deferrals are not included.


I think I would not want to bother with making her a W-2 employee, especially given the extra headache and the fact that we'd be able to nearly maximize employer contributions as a 50% owner. So she's probably also be limited to 20% as employer contributions, and the remainder (up to $54k) as post-tax. Then there's the $18,000+$6,000 pre-tax matching in her other 401(k) plan, and a potential of $30k post-tax there (although if it turns out that's allowed, we'll probably just do that).

ERISA Stone wrote:You don't generally need to maintain cost basis for a 401k plan. You may have to separate earnings/contributions/distributions on an annual basis, but that's an easy calculation for solo(k)s.


Wouldn't we need cost basis to know how much earnings are based on Roth contributions and how many are pre-tax?

Spirit Rider wrote:That is correct. You would have to track contributions/earnings of who, when, what and where (which sub account). You will have to track this regardless for after-tax contributions.


But if I have sub-accounts that's essentially tracked for me, right? I can just contribute 100% of Roth to one account for each of us, 100% pre-tax to another account for each of us?

Spirit Rider wrote:Since this is your own one-participant 401k, you can utilize separate traditional pre-tax, Roth post-tax and after-tax sub accounts regardless of who the custodian is, as long as the 401k plan/adoption agreement supports those features.


I see. I assumed sub-accounts was a feature of the brokerage, not the plan. I'll have to ask potential brokerages about that.

Spirit Rider wrote:Actually, there are several ways to legally have a 50:50 joint ownership, S-Corp, Partnership and Qualified Joint Venture (QJV). Normally, you can not have a QJV with an LLC, except... in a community property state. A QJV is ideal for your situation. It allows you to allocate the business income/deductions between spouses. To elect QJV status each spouse simply files their own Schedule C and Schedule SE using the allocated amounts.


We live in California so that might be an option. She already materially participates in the business but that can be tracked to ensure compliance. This points me at very good information, thank you!

Spirit Rider wrote:P.P.S. If you select the effective date to be 1/1/17 on the one-participant 401k adoption agreement as I suggested previously, This brings the entire year's net self-employment income available for both spouses employer contributions. This helps with ERISA Stones' recommendation to to maximize pre-tax contributions. Then you can both do after-tax contributions for the remainder of the $54K. Since by splitting the net-self-employment income between you you may no longer maximizing your $54K with just employee deferrals/employer contributions. However, this allows the maximum total employer contributions to the plan.


Indeed, it sounds like if we get about $150k each from the business (a likely ballpark figure), we'd only be $30k (20%) eligible for pre-tax treatment. The other $6k would have to be post-tax with Roth conversion (or rather, $6k+$18k for her, since she maximizes 402(g) limit in the other plan).

Earl Lemongrab wrote:Vanguard doesn't normally allow rollover into their individual 401(k)s. They also don't allow Admiral or ETF shares. I don't know if any of that changes if you devise your own plan.


Right, which is why I was looking at E*Trade. I have to ensure that rollover, after-tax, and in-service distribution would be allowed with my own plan. As for Admiral/ETF, that's another point for Fidelity, unless that's also negotiable with a custom plan.

So here's the summary, under the assumption that she truly cannot do post-tax contributions to her other 401(k):
Her:
$18k+$6k matching other employer
Employer max pre-tax (~$30k) solo 401k. Can do up to $24k post-tax + backdoor, but we can't really afford that much right now so it's theoretical.

Me:
$18k Roth (I'm still leaning this way) or pre-tax
Employer max pre-tax ($~30k)
$6k post-tax + backdoor

Get a custom plan document to allow traditional IRA rollover in, after-tax contributions, and in-service distributions (i.e. allow rollover to an IRA account for Roth conversion). Bonus: admirals shares. Double bonus: subaccounts.

Choose a brokerage that has the funds I want for all of this. Maybe Fidelity, maybe Vanguard. Probably not E*Trade given commissions.

Does that seem sound?

Edit: Bolded above, meant traditional not Roth
Last edited by BusterMcTaco on Tue Jul 18, 2017 5:29 pm, edited 1 time in total.

Spirit Rider
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Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby Spirit Rider » Tue Jul 18, 2017 5:24 pm

BusterMcTaco wrote:
ERISA Stone wrote:You don't generally need to maintain cost basis for a 401k plan. You may have to separate earnings/contributions/distributions on an annual basis, but that's an easy calculation for solo(k)s.
Wouldn't we need cost basis to know how much earnings are based on Roth contributions and how many are pre-tax?

Cost basis is a term for the purchase price of individual securities. You have no need to track this, only contributions, earnings and distributions. Contributions, earnings,100% full distributions and rinse and repeat makes this easier to track.

Spirit Rider wrote:That is correct. You would have to track contributions/earnings of who, when, what and where (which sub account). You will have to track this regardless for after-tax contributions.
But if I have sub-accounts that's essentially tracked for me, right? I can just contribute 100% of Roth to one account for each of us, 100% pre-tax to another account for each of us?

Remember, these are investment only accounts. They will track contributions, earnings and distributions, but all reporting will be on you. If you use a pooled account at Vanguard or elsewhere you will also have to track the sub accounts yourself.

Spirit Rider wrote:Since this is your own one-participant 401k, you can utilize separate traditional pre-tax, Roth post-tax and after-tax sub accounts regardless of who the custodian is, as long as the 401k plan/adoption agreement supports those features.
I see. I assumed sub-accounts was a feature of the brokerage, not the plan. I'll have to ask potential brokerages about that

You are going to want sub accounts, whether the custodian offers you a separate account for each person/account type or a single pooled account. However, the 401k plan document must support the plan types you want.

Earl Lemongrab wrote:Vanguard doesn't normally allow rollover into their individual 401(k)s. They also don't allow Admiral or ETF shares. I don't know if any of that changes if you devise your own plan.
Right, which is why I was looking at E*Trade. I have to ensure that rollover, after-tax, and in-service distribution would be allowed with my own plan. As for Admiral/ETF, that's another point for Fidelity, unless that's also negotiable with a custom plan.

The features and policies of a one-participant 401k plan provider are not relevant if you are setting up your own plan. They will only be acting as a custodian for the plan. You select your own plan features and develop you own procedures. For example, how often do you want to rollover from your after-tax sub account to a Roth IRA, that is your choice. It is an administrative task to manage, but there is still only one 1099-R per year.

Get a custom plan document to allow Roth IRA rollover in, after-tax contributions, and in-service distributions (i.e. allow rollover to an IRA account for Roth conversion). Bonus: admirals shares. Double bonus: subaccounts.

IRS regulations do not allow Roth IRAs to be rolled to anywhere except to another Roth IRA. You only want to rollover directly to Roth IRA accounts. You want the only Roth conversions to be tax-free Backdoor Roth IRA contributions. Since you will have investment only accounts, you should be able to invest in anything you could invest in in a brokerage account.

Choose a brokerage that has the funds I want for all of this. Maybe Fidelity, maybe Vanguard. Probably not E*Trade given commissions. Does that seem sound?

Just remember, these investment only accounts are intended for use by professional TPAs. You are essentially a DIY rookie "self-administrator. You better get your ducks in a row ahead of time. Think of this as the wholesale side of these financial institutions. They are not your "I'm going it alone" customer support service.

Edit: Fixed the formatting.
Last edited by Spirit Rider on Tue Jul 18, 2017 5:33 pm, edited 2 times in total.

BusterMcTaco
Posts: 15
Joined: Tue Jul 11, 2017 6:36 pm

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby BusterMcTaco » Tue Jul 18, 2017 5:30 pm

Spirit Rider wrote:IRS regulations do not allow Roth IRAs to be rolled to anywhere except to another Roth IRA.


Sorry, I misspoke. I meant roll in a traditional IRA to the solo 401k (to open the path for back-door Roth conversions).

BusterMcTaco
Posts: 15
Joined: Tue Jul 11, 2017 6:36 pm

Re: Solo-401k options if no after-tax contributions in Wife's 401k?

Postby BusterMcTaco » Wed Jul 26, 2017 11:59 pm

Spirit Rider wrote:Your wife would only need to "materially participate" in the business. This is a relatively easy benchmark to obtain. For example, one qualification is for your wife to work more than 100 hours in the activity during the year, and no one else works more than she does. So if your wife spends more that 100 hours/year on say administrative tasks (accounting, record keeping, one participant 401k administration, etc...) and you spend less time than her on these tasks, she materially participates and you can split the income/deductions 50:50.


So I read Pub 925 myself, and then had my attorney review it, and it sounds like the "activity" in this context is the business as a whole, not a particular aspect of the business. So in order for this particular clause to apply, I would have to spend less than 100 hours a year on the business, which is clearly not the case. It seems the only way for her to "materially participate" would be to put in 500 hours in a year into the business. This isn't an insurmountable goal, but it's certainly harder on her time. Still, for the benefit, we're considering it and figuring out what her projects could be (there is no denying that I could use the help).

If you have a good source as to your original interpretation of only needing 100 hours, I would love to know. It would simplify things immensely.

Thanks as always.


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