Mega Backdoor Roth Questions

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eddiemoney
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Mega Backdoor Roth Questions

Post by eddiemoney »

Please help me confirm I can proceed with MBR in 2019, and if I've got all the steps right.

1. I have no tIRA, SEP, or Simple IRA, so no pro-rata concern. I do have two (2) Roth IRA: one TD Institutional (with a custodian); the other Vanguard. These are fine.

2. I work for [a company --admin LadyGeek] which allows in-service withdrawals of after-tax contributions. I've made post-tax contributions in 2017 and 2018, none in 2019.

3. According to the plan/form, th in-service withdrawals would appear to be made directly to me. Moreover, I can specify the amount of the after-tax contribution to be withdrawn (which at maximum includes the earnings). There's an option either "some or all is rollover" or "none is rollover", which presumably controls whether or not they take out 20% for taxes.

4. I'm assuming I can specify to move out ONLY the contribution amount (to save me the headache of taxes or pushing the small earnings into a tIRA.

5. If I request the withdrawal check, receive it, and within 60 days deposit it into Vanguard, it can count as a Roth IRA contribution, yes? How do they know I'm doing the right thing here?

6. In TY2019, I'll need to file a rollover on 1040, lines 16a/b as if it's a "direct" rollover. In TurboTax, I'll enter 1099-R, specify a gross distribution, no taxable amount (since I'll withdrawal less) and indicate it was rolled to a Roth IRA from "after-tax contributions" and that I did not move any of these into a traditional IRA. (I'm using this guide here, https://thefinancebuff.com/mega-backdoo ... botax.html)


I'm hoping someone can provide some feel-good positive confirmations here (before I complicate things further). That said, ultimately looking to move funds into a Self-Directed IRA (not yet setup). To that end, I'm wondering:

Q1. Can I move existing non-earnings Roth contributions from my (2) Roth IRAs into the "Checkbook IRA" at inception?
Q2. Can I add the 401lk Megabackdoor roth directly into this LLC? Is there any benefit or drawback versus first moving it into the Vanguard Roth IRA?
Q3. Can I move 401k after-tax into Vanguard roth IRA in 2019, and a few months later move it into the Self-Directed Roth IRA?

I'm very concerned about this "blowing up" and all taxes being owed and (more importantly) ruining my tax shield. The sums are all less than 50k, but timing is also important to me.
mighty72
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Re: Mega Backdoor Roth Questions

Post by mighty72 »

[since eddiemoney had a bunch of questions and first time poster, I moved the post to new topic]

eddiemoney: Welcome to the forum!
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

eddiemoney wrote: Fri May 17, 2019 4:04 pm Please help me confirm I can proceed with MBR in 2019, and if I've got all the steps right.

1. I have no tIRA, SEP, or Simple IRA, so no pro-rata concern. I do have two (2) Roth IRA: one TD Institutional (with a custodian); the other Vanguard. These are fine.
The presence of tIRA, SEP or SIMPLE IRA is not relevant to the mega back door. They are relevant to the ordinary back door.


3. According to the plan/form, th in-service withdrawals would appear to be made directly to me. Moreover, I can specify the amount of the after-tax contribution to be withdrawn (which at maximum includes the earnings). There's an option either "some or all is rollover" or "none is rollover", which presumably controls whether or not they take out 20% for taxes.

4. I'm assuming I can specify to move out ONLY the contribution amount (to save me the headache of taxes or pushing the small earnings into a tIRA.
No. Earnings are required to come out with contributions. If you only take part, you get a pro-rated amount of earnings and contributions.

I think you are headed in the wrong direction by requesting a check. And you do NOT want to get involved in the 20% withholding. Try to do a trustee to trustee transfer or a direct rollover (whichever it is called - I'm not sure). Note that it is OK to get a check made out to your Roth IRA, but not to you.
Topic Author
eddiemoney
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Re: Mega Backdoor Roth Questions

Post by eddiemoney »

OK, I'm not sure how to do that (yet), but a valuable insight nonetheless. Still curious because I saw verbiage about 60 days somewhere, but maybe it was in reference to a standard rollover, for which the a different rule may apply. Anyway, I won't get it made out to me. Thank you!!

Also GTK that I can't help but get the after-tax contribution, so I'll just take max and then pay that small tax on earnings distribution rather than worry about shunting it over to a tIRA (that would require opening as well).

EDIT: Maybe that doesn't quite work because the destination trustee won't know what to do with the earnings portion. I suppose I can have a tIRA set up at Vanguard (since prorata doesn't matter for MBR), but this does raise a more serious question of how to handle it at the Self-Directed IRA. I'm under the impression:

I pay a Trust/Custodian to setup a (Roth) IRA;
The (Roth) IRA owns the LLC,
The the LLC can invest in weird stuff

I don't what will happen if the Vanguard-to-SD-Trustee transfer is both types. Because I think I pay the Trust/Custodian I pay to setup a single (Roth) IRA. I'm guessing I'll get sacked with paying to set up a tIRA with them. Maybe that's fine.
Last edited by eddiemoney on Fri May 17, 2019 7:41 pm, edited 1 time in total.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

eddiemoney wrote: Fri May 17, 2019 7:29 pm Also GTK that I can't help but get the after-tax contribution, so I'll just take max and then pay that small tax on earnings distribution rather than worry about shunting it over to a tIRA (that would require opening as well).
Can you re-word this please? I don't know what you are saying.
Topic Author
eddiemoney
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Re: Mega Backdoor Roth Questions

Post by eddiemoney »

JG, sorry about that. And thanks for your patience. I was weighing the consequence of dealing with the taxable portion. Ideally, I'd just pay that taxable portion, but if I am able to complete a trustee-to-trustee transfer, then the recipient (Vanguard), would receive an earnings portion. That portion wouldn't be eligible for the Roth IRA, so I'd need a tIRA with them. That seems fine, except then I wonder how to handle it at the onward destination of the Self-Directed Trustee, which seems may charge a premium for setting up a separate IRA account.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

eddiemoney wrote: Fri May 17, 2019 7:29 pm EDIT: Maybe that doesn't quite work because the destination trustee won't know what to do with the earnings portion. I suppose I can have a tIRA set up at Vanguard (since prorata doesn't matter for MBR), but this does raise a more serious question of how to handle it at the Self-Directed IRA. I'm under the impression:

I pay a Trust/Custodian to setup a (Roth) IRA;
The (Roth) IRA owns the LLC,
The the LLC can invest in weird stuff

I don't what will happen if the Vanguard-to-SD-Trustee transfer is both types. Because I think I pay the Trust/Custodian I pay to setup a single (Roth) IRA. I'm guessing I'll get sacked with paying to set up a tIRA with them. Maybe that's fine.
I cannot help you with the self directed IRA.

I think you need to figure out the mega back door first. There are several ways it can be done. And some plans don't make it easy so let's figure out what your plan allows first. Worry about the self directed IRA another time.
lakpr
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Re: Mega Backdoor Roth Questions

Post by lakpr »

eddiemoney,

Might an in-plan Roth conversion, if allowed, be much simpler and avoid all the confusion?

What I do for MBR is to convert after-tax contributions to Roth 401k within the plan once every 2 paychecks (so, once a month). I try to convert a little less than I contribute, rounded to the nearest $100. In my case I do that simply because the plan wants me to fill out a printed form, sign it and mail it in; so it is always possible that by the time my letter reaches them and they execute it, the markets may have done funky things and lost money. I had a conversion form returned to me once without action, with the explanation that the after-tax account didn’t have the $1300 I wanted to convert.

[ the other alternative is to fax the signed form, :shock: that I wasn’t willing to entertain ]
Topic Author
eddiemoney
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Re: Mega Backdoor Roth Questions

Post by eddiemoney »

Indeed, JG. I'll see what I can figure out from Vanguard, and/or with the plan.

Agree lakpr that might work, but apparently I'm allowed only one such conversion per year. Suboptimal, but a fallback
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

This is all about how the plan handles your distribution.

Some will do a nice split rollover and send the after-tax money to Roth IRA and the pre-tax money to tIRA. You never get control over the money although you might put your hands on a check (or two checks) which are made out to your IRA(s). If the checks are made out to your IRA(s), you never have control over the money. Nothing is withheld.

Some plans only do half of this.

Find out what your plan will do. If they say they will write you a check, find out if the check is made out to you or if the check is made out to your Roth IRA/IRA.

Then we can help more.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

P.S. The easiest thing to do is roll everything to Roth IRA and pay taxes on the pre-tax money (the earnings that have accrued on your contributions).
Topic Author
eddiemoney
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Re: Mega Backdoor Roth Questions

Post by eddiemoney »

Indeed. I think maybe that dropdown allows me to specify the institution to which the check(s) will be cut, but I don't want to proceed just yet. I'm hoping to find some clarity in a phone call Monday morning.

While it might be simpler, I do suspect it would not be favorable for a full in-plan conversion as the tax burden would be pretty hefty, and I think I'll benefit from the larger pretax portion. I might feel differently if I could roll that into the Self-directed Roth. You probably mean conversion of the aftertax portion only, which could work, but might limit me another Roth IRA injection this year, which I'm hoping to achieve.

Thanks again for your help.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

eddiemoney wrote: Fri May 17, 2019 8:49 pm You probably mean conversion of the aftertax portion only, which could work, but might limit me another Roth IRA injection this year, which I'm hoping to achieve.
I'm not sure what you mean by this, but rolling money from your 401k does not limit what you can put into Roth IRA each year.

If you are over the income limit to contribute directly to Roth IRA and plan to use the "back door" method to put money into Roth IRA, the tIRA that will be created with the earnings from your after-tax account is going to interfere with that.
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

eddiemoney wrote: Fri May 17, 2019 4:04 pm 1. I have no tIRA, SEP, or Simple IRA, so no pro-rata concern. I do have two (2) Roth IRA: one TD Institutional (with a custodian); the other Vanguard. These are fine.
As has been pointed out, pre-tax balances in traditional, SEP and SIMPLE IRA accounts are irrelevant to a MBR. They are only relevant to a BR.
2. I work for [a company --admin LadyGeek] which allows in-service withdrawals of after-tax contributions. I've made post-tax contributions in 2017 and 2018, none in 2019.
This likely means that you have a non-trivial amount of pre-tax earnings.
3. According to the plan/form, th in-service withdrawals would appear to be made directly to me. Moreover, I can specify the amount of the after-tax contribution to be withdrawn (which at maximum includes the earnings). There's an option either "some or all is rollover" or "none is rollover", which presumably controls whether or not they take out 20% for taxes.
Under IRS regulation 26 CFR 1.401(a)(31)-1, they must allow you to elect at least one direct rollover to a destination of your choice. That may involve a check made out to the destination custodian FBO your IRA account and mailed to you for forwarding to the destination custodian. That is still a direct rollover.

If a check is made out to you, cashed/deposited and a 60-day rollover is performed that is an indirect rollover. It is only when you do an indirect rollover of pre-tax assets is there 20% mandatory withholding (never do that).

Ideally, you will want to do a split rollover of the employee after-tax contributions to a Roth IRA and the pre-tax earnings to a traditional IRA. Then rollover the IRA back into the plan. If you are doing BR and IRA rollovers are not accepted by the plan or another plan, you will want to do a single rollover to a Roth IRA, but those non-trivial earnings will be taxable.

If the plan only permits a single direct rollover, you can still effectively make a split rollover. Under 1.401(a)(31)-1, not only must they allow one direct rollover, but they must always allow you to receive the after-tax contributions as a distribution. The solution is to take a direct rollover of the pre-tax earnings to a traditional IRA and a distribution of the after-tax contributions. Then do a 60-day rollover to a Roth IRA.
4. I'm assuming I can specify to move out ONLY the contribution amount (to save me the headache of taxes or pushing the small earnings into a tIRA.
The some, all or none from above has nothing to do with the 20% withholding on pre-tax amounts. Any rollover must include proportional after-tax contributions and pre-tax earnings. This is why you should always rollover all.
5. If I request the withdrawal check, receive it, and within 60 days deposit it into Vanguard, it can count as a Roth IRA contribution, yes? How do they know I'm doing the right thing here?
While a rollover is technically a rollover contribution, it is separate and distinct from ordinary contributions. As I pointed out above your reading of you plan's form is likely in error. If they don't support direct split rollovers, the form your custodian requires for contributions will have an option to designate it as a rollover.
6. In TY2019, I'll need to file a rollover on 1040, lines 16a/b as if it's a "direct" rollover. In TurboTax, I'll enter 1099-R, specify a gross distribution, no taxable amount (since I'll withdrawal less) and indicate it was rolled to a Roth IRA from "after-tax contributions" and that I did not move any of these into a traditional IRA. (I'm using this guide here, https://thefinancebuff.com/mega-backdoo ... botax.html)
Subsequent to the TCJA and the 2018 tax filing all Form 1099-Rs are reported on Lines 4a/4b. There is no room or requirement for all that verbage. You enter the rollover amount on 4a, the taxable amount on 4b and simply write in "rollover".
I'm hoping someone can provide some feel-good positive confirmations here (before I complicate things further). That said, ultimately looking to move funds into a Self-Directed IRA (not yet setup). To that end, I'm wondering:
Why oh why do people insist on taking such risks in their retirement accounts. I will not facilitate the potential disaster by answering any of these questions
I'm very concerned about this "blowing up" and all taxes being owed and (more importantly) ruining my tax shield. The sums are all less than 50k, but timing is also important to me.
If you were really worried about blowing up your retirement savings, you wouldn't be using a self-directed retirement account.
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

Spirit Rider wrote: Sat May 18, 2019 8:40 am If the plan only permits a single direct rollover, you can still effectively make a split rollover. Under 1.401(a)(31)-1, not only must they allow one direct rollover, but they must always allow you to receive the after-tax contributions as a distribution. The solution is to take a direct rollover of the pre-tax earnings to a traditional IRA and a distribution of the after-tax contributions. Then do a 60-day rollover to a Roth IRA.
Let me see if I have this right.

Do a direct rollover of pre-tax money to pre-tax IRA and there is no withholding because it is a direct rollover. The check will come to employee but is made out to the employee's tIRA (not the employee) and the check is then forwarded to the tIRA.

Also, take a distribution of the after-tax contributions - because there is no withholding on that part - and do a 60 day rollover to Roth IRA. In other words, they send a check made out to the employee, the employee puts that into employee's bank account....then employee sends a check in the same amount to Roth IRA within 60 days specifying that it is a rollover contribution.

And don't do it the other way around. Have I got it right?
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

retiredjg wrote: Sat May 18, 2019 9:02 am And don't do it the other way around. Have I got it right?
Exactly, with you adding the details of the finer points.
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

Thanks. I knew you could do something like that but was not clear on which to do what with.... :happy (...and had more or less assumed it would be the other way).
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Re: Mega Backdoor Roth Questions

Post by seed4great »

retiredjg wrote: Fri May 17, 2019 8:26 pm P.S. The easiest thing to do is roll everything to Roth IRA and pay taxes on the pre-tax money (the earnings that have accrued on your contributions).
Even easier would be to have a regular rollover, let's say every month: put all after tax contributions into some money market fund (some plans allow cash deposit) to make sure earnings are minimal or non-existent, then convert the entire amount into Roth IRA. Repeat it next month, etc. This would guarantee little or no tax.
The greatest lesson in life is to know that even fools are right sometimes.
lakpr
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Re: Mega Backdoor Roth Questions

Post by lakpr »

seed4great wrote: Sat May 18, 2019 5:16 pm Even easier would be to have a regular rollover, let's say every month: put all after tax contributions into some money market fund (some plans allow cash deposit) to make sure earnings are minimal or non-existent, then convert the entire amount into Roth IRA. Repeat it next month, etc. This would guarantee little or no tax.
This presupposes two things:

1. The plan allows free conversions of the after-tax contributions to the plan. I assumed that too, but I saw a post kn this forum that said every conversion, even in-plan, has $25 per occurrence. That is steep $300 fee even if you convert once a month. I was very surprised.

2, the participant is willing to be out of the market from contribution date till conversion date. I don’t know about others, but personally no way. I might miss some upswings that could occur. Better to be in the market, pay taxes in the gains 30 cents on the dollar when converting, rather than lose that dollar altogether.
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

seed4great wrote: Sat May 18, 2019 5:16 pm Even easier would be to have a regular rollover, let's say every month: put all after tax contributions into some money market fund (some plans allow cash deposit) to make sure earnings are minimal or non-existent, then convert the entire amount into Roth IRA. Repeat it next month, etc. This would guarantee little or no tax.
I have to agree with @lakpr.

The goal is to maximize your after-tax return not minimize your taxes. It is totally counter-productive to minimize your returns just to minimize your taxes. Why don't we leave our 401k money in money market funds, then we can be sure to minimize our taxes.

The goal should be to minimize taxes but not at the expense of returns. You should do your rollovers as expeditiously and as cost effectively as possible. This illogical advice is just as wrong for the Mega Backdoor Roth as it is for the Backdoor Roth. Except in that case people seem to have an illogical obsession with totally tax-free Roth conversions as it a couple of bucks of earnings matters.
catchinup
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Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Sat May 18, 2019 8:40 am
As has been pointed out, pre-tax balances in traditional, SEP and SIMPLE IRA accounts are irrelevant to a MBR. They are only relevant to a BR.
Hi I have a couple of questions:

1) I have a Solo 401K with Vanguard with tax deferred contributions. The Vanguard plan doesn't allow in service distributions and after tax contributions. So if I'm planning to open a new Solo 401K account with one of the providers discussed on this board -- what do I need to do with the existing deferred contributions in the Vanguard 401K? Do I close the Vanguard account, roll the funds into a deferred IRA before opening a brand new solo 401k account with my new custodian? Or do I transfer the funds into the new solo 401k?

2) Do the after-tax contributions impact the K-1 profit passed through to my personal return? I'm the (57 y/o) owner of my S-Corp and the sole employee. Trying to understand how this works. So let's say the S-corp has $52.5K profit left after salary and company deferred 401k matching. Usually that entire amount would get passed to my personal return as K-1. In my example below, since I'm over 50, I think I have $19.5K available for a voluntary after tax contribution? Does that figure in before the Corporate net profit? Or do I still report $52,500 in pass through and the voluntary after tax comes out of it?

Image

Thanks for any help!
Spirit Rider
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

  1. You will need to amend your one-participant 401k plan to a custom provider 401k plan that allows employee after-tax contributions and in-service rollovers of those contributions and earnings. You do this by completing the new provider's adoption agreement and selecting to amend an existing plan. Then open investment only accounts at the custodian and/or the provider select. Then do a direct trustee -> trustee transfer of the current one-participant 401k plan assets to the new one-participant 401k plan.
  2. The employee after-tax contribution should be contributed from your W-2 wages or possibly personal funds and have nothing to do with your K-1. Annual additions can not exceed the lesser of the statutory limit (2019 = $56K) or your compensation (W-2 Box 1).
catchinup
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Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Mon Sep 02, 2019 1:08 pm or possibly personal funds
I was planning to use mostly personal, after tax savings, because most of the W2 wages will be spent on living expenses. Is that OK? Or would the IRS say I should really be increasing my salary (i.e. tax less pass thru) and contributing based on W2 wages into either deferred Solo 401k and/or Solo Roth 401K? Taking pass-thru is helpful because it lowers payroll taxes and I can take 199A deduction on my personal return.

Thanks
Spirit Rider
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

catchinup wrote: Mon Sep 02, 2019 3:30 pm
Spirit Rider wrote: Mon Sep 02, 2019 1:08 pm or possibly personal funds
I was planning to use mostly personal, after tax savings, because most of the W2 wages will be spent on living expenses. Is that OK? Or would the IRS say I should really be increasing my salary (i.e. tax less pass thru) and contributing based on W2 wages into either deferred Solo 401k and/or Solo Roth 401K? Taking pass-thru is helpful because it lowers payroll taxes and I can take 199A deduction on my personal return.
First of all after-tax funds are fungible. This means it would make no difference if you deducted the employee after-tax contributions from W-2 wages and used the personal after-tax savings for living expenses instead.

The reason I put that in italics is because there is precious little IRS guidance for employee after-tax contributions. Specifically including whether they can be made from the participant's personal after-tax funds. However, of all the plans we have seen reported on Bogleheads offering employee after-tax contributions. I am not aware of any reports indicating they allow those employees to make employee after-tax contributions from the participant's personal after-tax funds.

An S-Corp 2% shareholder-employee's elective employee contributions must be deducted from their W-2 wages and contributed by the S-Corp from S-Corp accounts. An S-Corp's employer contributions must be contributed by the S-Corp from S-Corp accounts. The consensus of professional TPAs is that employee after-tax contributions should be deducted from the participants W-2 wages and contributed by the S-Corp.

Generally, things like this are controlled by the plan document. If the plan document is silent on this, you would be on your own if you were to make employee after-tax contributions from personal after-tax funds. The unique thing is that one-participant plans are not ERISA plans and do not require a separate trust for the plan. Whether that allows to you to make employee after-tax contributions from personal after-tax funds, I do not know.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

Spirit Rider wrote: Mon Sep 02, 2019 7:04 pm However, of all the plans we have seen reported on Bogleheads offering employee after-tax contributions. I am not aware of any reports indicating they allow those employees to make employee after-tax contributions from the participant's personal after-tax funds.
I recall one poster who said s/he did this. Deposited a check into the plan on Friday and did the conversion/rollover to Roth on the following Monday or Tuesday and avoided any earnings this way. I think this was done once a year. It was NOT a one-participant plan.

I have a vague memory that one other poster mentioned doing something similar but do not recall any details so I'm not sure that memory is even correct.
Spirit Rider
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

Here again as we are in uncharted territory, the procedure for an S-Corp is unknown. However, If an S-Corp shareholder-employee is going to make employee after-tax contributions from personal funds. I think it would probably be best to not involve the S-Corp and make the contribution directly to the one-participant plan's custodial accounts. This is unlike all employee elective and employer contributions that must be contributed from the S-Corp's accounts.
retiredjg
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Re: Mega Backdoor Roth Questions

Post by retiredjg »

A lot of this solo-participant 401k with mega back door option is uncharted in my mind. Particularly people trying to do it without a TPA (your plan provider IS NOT a TPA). I fear there will be some massive and painful blunders before we understand how all this should work. :(
I do hope that is wrong.

Catchinup, I certainly do not mean to suggest that it is OK for you to do what you are asking about, so please do not take my comment to mean anything like that.
catchinup
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Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Mon Sep 02, 2019 7:04 pm The consensus of professional TPAs is that employee after-tax contributions should be deducted from the participants W-2 wages and contributed by the S-Corp.
Hi! Based on your response, I've tried to work out how the contributions would be done in Excel. I'm not sure if it's correct and I'm not sure which boxes to report the Employee after tax and Deferred Salary contributions on the W2. I put a snapshot of the categories from a recent tax transcript to the right. There is a box 11 on the W2 that says "Nonqualified Plan". Maybe the after tax contribution goes there?

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bradpevans
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Re: Mega Backdoor Roth Questions

Post by bradpevans »

retiredjg wrote: Fri May 17, 2019 8:26 pm P.S. The easiest thing to do is roll everything to Roth IRA and pay taxes on the pre-tax money (the earnings that have accrued on your contributions).

I agree with this route. If you had the ability to "instantly" transfer, then all the growth happens inside the Roth, which is the whole point. The "taxes now" amount shouldn't be that much and then you have a bit more in Roth (vs. the growth added to traditional only (and taxed later))

The longer you wait the more you are "double-taxed"
marginal rate to get the money into after tax (can't be avoided)
marginal rate again on the growth before transferring (can be avoided/minimized)
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Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

Employee after-tax and actual employer contributions are not reported on Form W-2. Also, a 401k is a qualified plan.

All contributions are reported on Form 5500-EZ if required due to a one-participant plan year-end balance > $250K.
catchinup
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Re: Mega Backdoor Roth Questions

Post by catchinup »

bradpevans wrote: Wed Sep 04, 2019 7:48 am
retiredjg wrote: Fri May 17, 2019 8:26 pm P.S. The easiest thing to do is roll everything to Roth IRA and pay taxes on the pre-tax money (the earnings that have accrued on your contributions).

I agree with this route. If you had the ability to "instantly" transfer, then all the growth happens inside the Roth, which is the whole point. The "taxes now" amount shouldn't be that much and then you have a bit more in Roth (vs. the growth added to traditional only (and taxed later))

The longer you wait the more you are "double-taxed"
marginal rate to get the money into after tax (can't be avoided)
marginal rate again on the growth before transferring (can be avoided/minimized)
Yes the idea is to take a distribution immediately into a Roth IRA and file a 1099 for minimal gains.
catchinup
Posts: 169
Joined: Sun Dec 31, 2017 6:35 pm

Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Tue Sep 03, 2019 10:51 am Here again as we are in uncharted territory, the procedure for an S-Corp is unknown. However, If an S-Corp shareholder-employee is going to make employee after-tax contributions from personal funds. I think it would probably be best to not involve the S-Corp and make the contribution directly to the one-participant plan's custodial accounts. This is unlike all employee elective and employer contributions that must be contributed from the S-Corp's accounts.
Thank you. Previously I understood you as saying the consensus was that it'd be best to have the S-Corp do the contribution on my behalf, making sure the after tax contribution amount was covered by my W2 wages.

When you say "it would be best no to involve the S-Corp" I think you are saying if I were to fund the contribution out of my personal bank account then best not to involve the S-Corp?

I haven't opened the new 401K plan yet. I should speak to the plan provider at this point about what the plan states in this regard. Again many thanks!
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 2:39 pm

Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

catchinup wrote: Thu Sep 05, 2019 2:48 am Thank you. Previously I understood you as saying the consensus was that it'd be best to have the S-Corp do the contribution on my behalf, making sure the after tax contribution amount was covered by my W2 wages.
Correct, the contributions should be deducted from your S-Corp 2% shareholder-employee's W-2 wages and the contributions actually made by the S-Corp. This is the way employers with non-owner/non-spouse employees handle employee after-tax contributions.
When you say "it would be best no to involve the S-Corp" I think you are saying if I were to fund the contribution out of my personal bank account then best not to involve the S-Corp?
Correct. It would be best if the payments from personal funds were made direct to the 401k plan custodial accounts.

However, as I stated earlier after-tax funds are fungible. There is no net difference between having employee after-tax contributions deducted from your S-Corp 2% shareholder-employee's W-2 wages and using other after-tax money to cover any shortfall in W-2 wages or making employee after-tax contributions directly from personal funds. Why take a gray area path that provides no real benefit.
I haven't opened the new 401K plan yet. I should speak to the plan provider at this point about what the plan states in this regard. Again many thanks!
catchinup
Posts: 169
Joined: Sun Dec 31, 2017 6:35 pm

Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Thu Sep 05, 2019 11:38 am
catchinup wrote: Thu Sep 05, 2019 2:48 am Thank you. Previously I understood you as saying the consensus was that it'd be best to have the S-Corp do the contribution on my behalf, making sure the after tax contribution amount was covered by my W2 wages.
Correct, the contributions should be deducted from your S-Corp 2% shareholder-employee's W-2 wages and the contributions actually made by the S-Corp. This is the way employers with non-owner/non-spouse employees handle employee after-tax contributions.
When you say "it would be best no to involve the S-Corp" I think you are saying if I were to fund the contribution out of my personal bank account then best not to involve the S-Corp?
Correct. It would be best if the payments from personal funds were made direct to the 401k plan custodial accounts.

However, as I stated earlier after-tax funds are fungible. There is no net difference between having employee after-tax contributions deducted from your S-Corp 2% shareholder-employee's W-2 wages and using other after-tax money to cover any shortfall in W-2 wages or making employee after-tax contributions directly from personal funds. Why take a gray area path that provides no real benefit.
I haven't opened the new 401K plan yet. I should speak to the plan provider at this point about what the plan states in this regard. Again many thanks!
One more question! Once my S-corp and I have exhausted the solo 401K limit for the current tax year, can I still as an individual invest in a Roth IRA (assuming I qualify based on salary limits) ? Thanks again.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 2:39 pm

Re: Mega Backdoor Roth Questions

Post by Spirit Rider »

catchinup wrote: Sun Sep 15, 2019 11:02 am I haven't opened the new 401K plan yet. I should speak to the plan provider at this point about what the plan states in this regard. Again many thanks!
You can certainly ask, but I wouldn't be surprised if the custom 401k plan document is silent on this issue. Also, I have to say I have not been impressed with the 401k plan knowledge of the plan document resellers in this space. Make no mistake, they are not professional TPAs.
One more question! Once my S-corp and I have exhausted the solo 401K limit for the current tax year, can I still as an individual invest in a Roth IRA (assuming I qualify based on salary limits) ? Thanks again.
Yes, they are two separate contribution limits.
catchinup
Posts: 169
Joined: Sun Dec 31, 2017 6:35 pm

Re: Mega Backdoor Roth Questions

Post by catchinup »

Spirit Rider wrote: Wed Sep 04, 2019 10:06 am Employee after-tax and actual employer contributions are not reported on Form W-2. Also, a 401k is a qualified plan.

All contributions are reported on Form 5500-EZ if required due to a one-participant plan year-end balance > $250K.
Hi!
Is form 5500-EZ the only place where one reports voluntary employee after tax contributions? Is there no place to report them on 120S? Also, looking at the form, I don't see a way to document any in-service distributions or to distinguish within the between employee tax deferred salary contributions and employee voluntary after tax. I just see one box for employee contribution. Is that not part of what this form cares about?

Thanks!
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