Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

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crystalbank
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Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Wed Aug 07, 2019 2:44 pm

Hi All,

Currently, have a Solo401k for my S-Corp with Vanguard and we contribute around 34k each (me and spouse, max out wage deferrals) to our 401k. That leaves us with a possibility of 22k each per year for after tax 401k contributions if we setup a 401k with a third party plan provider. But I don't know if the additional complexity is really worth it to justify the Mega backdoor roth. For starters, there is a setup fee and $125/yr maintenance fee, but on top of that there needs to be a trust setup for 401k with it's own EIN. It's more paperwork for sure and more reminders every year and additional complexity. Is a 22k per year extra roth space worth all this hassle?

Also, in the future if I decide to move back to a 401k with Vanguard is it even possible?

Edit: Original Post incorrectly referenced Third Party Plan provider as TPA.
Last edited by crystalbank on Wed Aug 07, 2019 3:04 pm, edited 1 time in total.

retiredjg
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Re: Solo401k with TPA for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by retiredjg » Wed Aug 07, 2019 3:00 pm

As I understand it, you do not use a TPA to set up a Solo 401k which can do the mega back door. Maybe I'm wrong cause a lot of people are asking questions using the same type of wording that you are using. If I'm wrong, maybe someone can point it out?

As I understand this, there is a plan provider - They provide the plan documents for a startup fee and also keep the documents up to date for an annual fee.

There is a separate third party administrator (TPA) - someone you pay who takes care of the daily, weekly, monthly, and annual duties of plan administration. This is not the plan provider, but a separate person/entity entirely. Some people are trying to do this TPA job themselves. I doubt that is wise.

Topic Author
crystalbank
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Re: Solo401k with TPA for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Wed Aug 07, 2019 3:02 pm

retiredjg wrote:
Wed Aug 07, 2019 3:00 pm
As I understand it, you do not use a TPA to set up a Solo 401k which can do the mega back door. Maybe I'm wrong cause a lot of people are asking questions using the same type of wording that you are using. If I'm wrong, maybe someone can point it out?

As I understand this, there is a plan provider - They provide the plan documents for a startup fee and also keep the documents up to date for an annual fee.

There is a separate third party administrator (TPA) - someone you pay who takes care of the daily, weekly, monthly, and annual duties of plan administration. This is not the plan provider, but a separate person/entity entirely. Some people are trying to do this TPA job themselves. I doubt that is wise.
My bad. Yes, not a TPA but a plan provider.

Spirit Rider
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by Spirit Rider » Wed Aug 07, 2019 9:07 pm

Note, the IRS requires a 401k plan to have a "trustee", but the IRS allows but does not require a one-participant 401k to have an actual trust. However, the provider may require an actual trust.

Topic Author
crystalbank
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Thu Aug 08, 2019 12:16 am

Spirit Rider wrote:
Wed Aug 07, 2019 9:07 pm
Note, the IRS requires a 401k plan to have a "trustee", but the IRS allows but does not require a one-participant 401k to have an actual trust. However, the provider may require an actual trust.
Hi Spirit Rider,

Thanks for the response. I'm not quite comfortable with starting a new trust. Who knows what paperwork and legal quagmire it'll lead to in the future. Any further thoughts on this matter?

Spirit Rider
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by Spirit Rider » Thu Aug 08, 2019 12:34 am

Are you sure the custom one-participant 401k providers adoption agreement requires you to create an actual trust with an EIN for the trust. The IRS/DOL do not require a one-participant 401k plan which is not an ERISA plan to have an actual trust or post a bond. Only 401k plans with non-spouse employees have that requirement.

All the brokerage custodians that provide non-prototype accounts for custom one-participant 401k plans only require plan "Trustees" and not actual trusts. Since one-participant 401k plans are not ERISA plans and trusts with the beneficiaries as trustees provide little asset protection. There is very little reason to create trusts for this purpose.

Topic Author
crystalbank
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Thu Aug 08, 2019 12:53 am

Spirit Rider wrote:
Thu Aug 08, 2019 12:34 am
Are you sure the custom one-participant 401k providers adoption agreement requires you to create an actual trust with an EIN for the trust. The IRS/DOL do not require a one-participant 401k plan which is not an ERISA plan to have an actual trust or post a bond. Only 401k plans with non-spouse employees have that requirement.

All the brokerage custodians that provide non-prototype accounts for custom one-participant 401k plans only require plan "Trustees" and not actual trusts. Since one-participant 401k plans are not ERISA plans and trusts with the beneficiaries as trustees provide little asset protection. There is very little reason to create trusts for this purpose.
I made sure to double check the trust requirement and they did confirm that their plan requires a trust with it's own EIN. For reference, the provider is mysolo401k.net. I'll contact them again tomorrow and see if I can get a plan that doesn't require a trust.

Topic Author
crystalbank
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Thu Aug 08, 2019 1:05 pm

Spirit Rider wrote:
Thu Aug 08, 2019 12:34 am
Are you sure the custom one-participant 401k providers adoption agreement requires you to create an actual trust with an EIN for the trust. The IRS/DOL do not require a one-participant 401k plan which is not an ERISA plan to have an actual trust or post a bond. Only 401k plans with non-spouse employees have that requirement.

All the brokerage custodians that provide non-prototype accounts for custom one-participant 401k plans only require plan "Trustees" and not actual trusts. Since one-participant 401k plans are not ERISA plans and trusts with the beneficiaries as trustees provide little asset protection. There is very little reason to create trusts for this purpose.
They pointed me to this IRS article https://www.irs.gov/retirement-plans/ho ... plan-trust which states the following.
Retirement plan trustees shouldn’t use the plan sponsor’s EIN for their retirement plan trust. See the EIN application page for further information.
From their own FAQ page - Why does Solo 401k need it's own EIN? https://www.mysolo401k.net/ein-number/
The 401k needs to have a separate EIN from your self-employed business or SSN. This is clear based on the IRS guidance and because the 401k is a retirement trust which is distinct from the Corporation (i.e. the account that will be set up at Fidelity for the 401k will not be an account for you personally but rather a 401k for your benefit). This is beneficial in the instance that any tax reporting is done with respect to the Solo 401k, it will be done with respect to the tax ID for the Solo 401k – if the tax reporting was done under your SSN the IRS would expect to see such income reported on your personal taxes (which of course you will not do since the income is growing on a tax-deferred basis in your Solo 401k).
Not sure if this information is accurate.

Spirit Rider
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by Spirit Rider » Thu Aug 08, 2019 3:19 pm

I have identified more than a dozen serious errors in MySolo401k.com FAQs. They have also given Boglehead forum members seriously incorrect advice. When confronted by evidence to the contrary from the Internal Revenue Code, IRS regulations and guidance. They just double down on their errors.
crystalbank wrote:
Thu Aug 08, 2019 1:05 pm
They pointed me to this IRS article https://www.irs.gov/retirement-plans/ho ... plan-trust which states the following.
Retirement plan trustees shouldn’t use the plan sponsor’s EIN for their retirement plan trust. See the EIN application page for further information.
While this is a true statement. Nothing in that statement requires a one-participant 401k plan to have a trust.

From their own FAQ page - Why does Solo 401k need it's own EIN? https://www.mysolo401k.net/ein-number/
The 401k needs to have a separate EIN from your self-employed business or SSN. This is clear based on the IRS guidance and because the 401k is a retirement trust which is distinct from the Corporation (i.e. the account that will be set up at Fidelity for the 401k will not b e an account for you personally but rather a 401k for your benefit).

This is beneficial in the instance that any tax reporting is done with respect to the Solo 401k, it will be done with respect to the tax ID for the Solo 401k – if the tax reporting was done under your SSN the IRS would expect to see such income reported on your personal taxes (which of course you will not do since the income is growing on a tax-deferred basis in your Solo 401k).
Not sure if this information is accurate.
Unlike a one-participant 401k from a mainstream provider that acts as a trustee, a custom one-participant 401k plan should have its own EIN. Then the trustee for that plan (you unless you pay someone to be a trustee) can open custodial accounts under that plan. I have never seen the various brokerages offering non-prototype accounts require a trust EIN. All they require is the information and signature of the trustee(s).

The bolded statement from above is incorrect. A 401k is a retirement plan and NOT a trust. Although a 401k plan covering non-spouse employees must have a trust to protect those employee's assets.

The second paragraph while true only demonstrates that when a 401k plan is required to report, it have an EIN and not use the SSN of the individual. A 401k plan only is required to report distributions/rollovers on a 1099-R or a Form 5500-EZ when the year-end balance exceeds $250K.

None of what they have required demonstrates that a trust is required. To further demonstrate this; while Fidelity and Vanguard act as both trustee and custodian for their one-participant 401k plans, Etrade, Schwab and TD Ameritrade only act as custodian. You have never heard them requiring the plan sponsors to set up a trust.

Finally, let's go to the Law. Section 403 of ERISA specifically provides an exception.

29 U.S. Code § 1103. Establishment of trust:
  1. Benefit plan assets to be held in trust; authority of trustees Except as provided in subsection (b), all assets of an employee benefit plan shall be held in trust by one or more trustees.
  2. Exceptions The requirements of subsection (a) of this section shall not apply—
    1. ...
    2. ...
    3. to a plan—
      1. some or all of the participants of which are employees described in section 401(c)(1) "self-employed individual" of title 26;

Also, the IRS/DOL have excepted all one-participant plans (including S-Corps) from the trust requirement.

abyan
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by abyan » Thu Aug 08, 2019 3:54 pm

I’m still trying to understand mega backdoor Roths, but putting that aside for a moment, I just set up a solo 401(k) at Schwab for my pass-through LLC ( because I plan on doing a backdoor Roth and need to get rid of my IRA) and it was super easy, and they were super helpful by phone. And I’m pretty sure I didn’t pay anything to set it up or run it. Why not go there or fidelity and get actual phone help from really good people ?

PS And I did need an EIN but absolutely did not establish a trust.

Topic Author
crystalbank
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Thu Aug 08, 2019 3:57 pm

Thanks for the extremely detailed response Spirit Rider, much appreciated.
Spirit Rider wrote:
Thu Aug 08, 2019 3:19 pm
I have identified more than a dozen serious errors in MySolo401k.com FAQs. They have also given Boglehead forum members seriously incorrect advice. When confronted by evidence to the contrary from the Internal Revenue Code, IRS regulations and guidance. They just double down on their errors.
Yes, somehow this whole process didn't pass the smell test and they weren't that helpful in explaining everything so I didn't pull the trigger.
Spirit Rider wrote:
Thu Aug 08, 2019 3:19 pm
Unlike a one-participant 401k from a mainstream provider that acts as a trustee, a custom one-participant 401k plan should have its own EIN. Then the trustee for that plan (you unless you pay someone to be a trustee) can open custodial accounts under that plan. I have never seen the various brokerages offering non-prototype accounts require a trust EIN. All they require is the information and signature of the trustee(s).
So a plan should have it's own EIN? From what I can tell that's what they were instructing me to do i.e. get a EIN just for the plan (Mind you, my S-Corp already has it's own EIN). AFAIK, there is no EIN for the trust itself (can it be a real trust then?) but the plan itself is called a 'trust' (like My Company Inc Solo 401k Trust). Confusing at best.
Last edited by crystalbank on Thu Aug 08, 2019 4:00 pm, edited 1 time in total.

Topic Author
crystalbank
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by crystalbank » Thu Aug 08, 2019 3:59 pm

abyan wrote:
Thu Aug 08, 2019 3:54 pm
I’m still trying to understand mega backdoor Roths, but putting that aside for a moment, I just set up a solo 401(k) at Schwab for my pass-through LLC ( because I plan on doing a backdoor Roth and need to get rid of my IRA) and it was super easy, and they were super helpful by phone. And I’m pretty sure I didn’t pay anything to set it up or run it. Why not go there or fidelity and get actual phone help from really good people ?

PS And I did need an EIN but absolutely did not establish a trust.
I already have a Solo 401k setup at Vanguard. AFAIK none of the big providers (Fidelity, Schwab, Vanguard) have an option to do Mega backdoor Roth, so I'm looking into adopting a plan that allows it using a third party plan provider, which is why I'm going through all these hoops.

EnjoyIt
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Re: Solo401k with Plan Provider for Mega Back Door Roth - Having second thoughts, worth the complexity?

Post by EnjoyIt » Thu Aug 08, 2019 4:09 pm

I have been looking to do something similar and find the complexity behind it bothersome. I am posting here to see how things go for you with mysolo401k.

BTW, I have been doing my own corporate and personal taxes for years including my own 5500 form for my individual401k at vanguard as well as a DBP that I hire an actuary to assist me.

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