Hello all,
I am setting up an i401k as a landing spot for my old 410k. I am wondering if I can provide a second benefit for myself, a mega backdoor Roth IRA. Do and of the plan documents for i401ks at various brokerage companies allow for after-tax contributions and in-service withdrawals? My wife and I save beyond maxing out our traditional retirement space, into a taxable brokerage account. But if instead, I could put 35k or so into a Roth IRA through a mega back door at my i401k that would be outstanding. Just wondering if this is possible.
Thanks
Hulk
i401k that allows mega backdoor Roth IRA
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Re: i401k that allows mega backdoor Roth IRA
The short answer is no. To the best of my knowledge, there are no mainstream one-participant 401k providers that allow after-tax contributions in their plans. The only way to do this currently is through third parties for plan documents and administration.
It is not clear to me that you understand that your business needs to have net self-employment earnings in the current year or any prior year to adopt a one-participant 401k. Also, only to the degree that there are net self-employment earnings left after any traditional/Roth 401k contributions, can you make any after-tax contributions
It is not clear to me that you understand that your business needs to have net self-employment earnings in the current year or any prior year to adopt a one-participant 401k. Also, only to the degree that there are net self-employment earnings left after any traditional/Roth 401k contributions, can you make any after-tax contributions
Re: i401k that allows mega backdoor Roth IRA
Thanks Spirit rider,Spirit Rider wrote: ↑Tue Dec 12, 2017 3:15 pm
It is not clear to me that you understand that your business needs to have net self-employment earnings in the current year or any prior year to adopt a one-participant 401k. Also, only to the degree that there are net self-employment earnings left after any traditional/Roth 401k contributions, can you make any after-tax contributions
I didn't think there was an off-the-shelf i401k plan document that would allow after tax contributions and in-service withdrawals, but thought id ask.
I do have self employment (1099) earnings in a side job. $1,000, not much but enough to open an i401k. Also, I actually haven't maxed out my employee contribution space even though I maxed out at $54,000 with my regular job (K1). I contributed $16,200 as an employee and $37,800 as an employer. Max allowed employer contribution is 233% of employee contribution so 16,200 x 233% = 37,800. 16,200 + 37,800 = 54000.
What I don't know is, can I contribute the full $1,000 1099 earnings into my new i401k? Or 14.3%/2 x 1000 = $982.50? Also, if the K1 401k split had been a normal 18/36 (and not 16.2/37.8), then how much can one contribute into the i401k? I understand it is only employer contributions if the employee 18k has been maxed out elsewhere, which max at 25% of earnings. So is the math 25% of earnings x 0.9825 (for employer portion of SE tax)? Then if would have only been 245.62? If that math is correct, then only 245.62 of every 1000 earned in a side job can go into a side i401k once the 18k bucket has been filled up. Correct?
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Re: i401k that allows mega backdoor Roth IRA
If you have only made a $16,200 employee deferral in 2017, that leaves $18,000 - $16,200 = $1,800 in additional employee deferral available for a one-participant 401k. Self-employed one-participant 401k contributions are based on net self-employment earnings = business profit - 1/2 SE tax.
However, I'm not sure where you are getting your calculations from. From Schedule SE, you multiply your $1,000 business profit by 0.9235 = $923.50. Then you apply the SE tax rate. Depending if or when your K1 income + business profit * 0.9235 >= the Social Security maximum wage base (2017 = $127,200), your SE tax rate could be 15.3%, 2.9% or an effective blended rate in between. You will have to complete Schedule SE to determine this.
Let's assume because of the large K1 contribution, that your K1 income is >= $127,200. In that case your 1/2 SE tax on $1,000 will be $1,000 * 0.9235 = $923.50 * 2.9% / 2 ~= $13. Your net self-employment earnings will be $1,000 - $13 = $987.
Since you have $1,800 in employee deferral space available, you could make an employee deferral of up to 100% of $987.
If you had maximized the full employee deferral limit (2017 = $18K, 2018 = $18.5K) you could only make an employer contribution of up to 25% of compensation. However, because the employer contribution itself is not compensation, it reduces the compensation. This requires the self-employed to use a special calculation which is 20% of net self-employment earnings. Your maximum employer contribution would be $987 * 20% = $197.
Edited to correct math errors.
However, I'm not sure where you are getting your calculations from. From Schedule SE, you multiply your $1,000 business profit by 0.9235 = $923.50. Then you apply the SE tax rate. Depending if or when your K1 income + business profit * 0.9235 >= the Social Security maximum wage base (2017 = $127,200), your SE tax rate could be 15.3%, 2.9% or an effective blended rate in between. You will have to complete Schedule SE to determine this.
Let's assume because of the large K1 contribution, that your K1 income is >= $127,200. In that case your 1/2 SE tax on $1,000 will be $1,000 * 0.9235 = $923.50 * 2.9% / 2 ~= $13. Your net self-employment earnings will be $1,000 - $13 = $987.
Since you have $1,800 in employee deferral space available, you could make an employee deferral of up to 100% of $987.
If you had maximized the full employee deferral limit (2017 = $18K, 2018 = $18.5K) you could only make an employer contribution of up to 25% of compensation. However, because the employer contribution itself is not compensation, it reduces the compensation. This requires the self-employed to use a special calculation which is 20% of net self-employment earnings. Your maximum employer contribution would be $987 * 20% = $197.
Edited to correct math errors.
Last edited by Spirit Rider on Wed Dec 13, 2017 3:23 pm, edited 1 time in total.
Re: i401k that allows mega backdoor Roth IRA
Excellent explanation, thank you so much.Spirit Rider wrote: ↑Wed Dec 13, 2017 10:46 am
Let's assume because of the large K1 contribution, that your K1 income is >= $127,200. In that case your 1/2 SE tax on $1,000 will be $1,000 * 0.9235 = $923.50 * 2.9% / 2 ~= $35. Your net self-employment earnings will be $1,000 - $35 = $965.
I do have a question though. $923.50 * 2.9%/2 does not equal $35. I am getting $13.39. Sorry, how are you getting to $35? (my prior calculation was wrong as well, I was using 14.3% instead of 15.3% and then dividing by 2)
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Re: i401k that allows mega backdoor Roth IRA
Seems like substitution problems are contagious. My formula was correct, but for some unknown reason I actually used 7.65%???
I will edit my post for the correct answer.
I will edit my post for the correct answer.