Individual 401k to a Mega Back Door Roth?

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Topic Author
Wimpy
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Joined: Thu Aug 05, 2021 12:01 pm

Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

Thanks for all of the great discussions and thought provoking topics. I have been lurking for a few months and wish I would have discovered this site long ago.

My question is in regard to moving money from an Individual 401k to a Mega Back Door Roth. Up until last year, I used a Roth IRA and a Solo 401k. My CFP thought it would be prudent to put money into Individual 401k starting last year. The contributions were post tax and he thought this would give me a tax advantage at the time of conversion to Roth.

For 2020, I put in approximately $26,800 and this year $38,500 (I am over 50). The current balance is approximately $68,000. He was unaware of the Mega Backdoor Roth much to my dismay. After some questioning and mentioning MBDR, he discovered it. I have asked them to look into converting the Individual 401k to MBDR and they have not responded (7 weeks now). Needless to say I am in the processing of leaving my CFP and while I have not told them I am leaving, I am sure they sense my unhappiness.

So my questions for this learned group:

Assuming they won’t answer me, what is my best course to determine if this can be converted?
Should I convert $38,500 this year and convert the rest at the beginning of next year?
Wait until I retire and convert it all then?

I will be filling out the template for review as I will be trying to get some answers on the mechanics of leaving my current CFP, e.g. sign up with Fidelity/Vanguard/Schwaub, determine the allocation and let them know?

At a high level my wife and I are 57 and will be retiring in 4 -5 years or so. We are debt free in LCOL area. Combined we are approximately at:

$1.9M in Tax Deferred
$400K in Roth
$300K in Taxable
$68K in Individual 401k

Thanks in Advance,

Wimpy
tashnewbie
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Re: Individual 401k to a Mega Back Door Roth?

Post by tashnewbie »

Welcome to the forum, Wimpy!!

You said the contributions to the solo 401k were "post-tax."

Does that mean the contributions were Roth 401k contributions?

Or were they after-tax non-Roth contributions?

In general, the MBDR is 2 steps. The ability to do the MBDR is plan-dependent. Some 401k plans don't allow after-tax non-Roth contributions, and they vary on which option is available for the second step. These are the steps:

1. After-tax, non-Roth contribution to 401k
2. In-plan Roth rollover/conversion to Roth 401k or in-service non-hardship withdrawal to Roth IRA (of the after-tax, non-Roth contributions)
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Duckie
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Re: Individual 401k to a Mega Back Door Roth?

Post by Duckie »

Wimpy wrote: Wed Oct 13, 2021 10:06 am My question is in regard to moving money from an Individual 401k to a Mega Back Door Roth. Up until last year, I used a Roth IRA and a Solo 401k. My CFP thought it would be prudent to put money into Individual 401k starting last year.
A solo 401k and an individual 401k are the same thing.
The contributions were post tax and he thought this would give me a tax advantage at the time of conversion to Roth.
By "post tax" do you mean Roth 401k or after-tax non-Roth 401k? While both are post-tax they are not the same thing.
I have asked them to look into converting the Individual 401k to MBDR and they have not responded (7 weeks now).
Just to be clear, you don't convert the plan, you convert the after-tax non-Roth 401k assets either in-service to a Roth IRA or in-plan to a Roth 401k.
Should I convert $38,500 this year and convert the rest at the beginning of next year?
If these contributions were after-tax non-Roth contributions then the sooner you convert, the better. And you can convert as much as you can afford. But I'm not sure you're talking about after-tax non-Roth contributions.
I will be filling out the template for review as I will be trying to get some answers on the mechanics of leaving my current CFP, e.g. sign up with Fidelity/Vanguard/Schwaub, determine the allocation and let them know?
If you plan to use the mega backdoor Roth (MBR) method you will need a non-prototype solo 401k plan that allows that. Fidelity, Schwab, and Vanguard only have standard off-the-shelf prototype solo 401k plans. I know that My Solo 401k and Ubiquity allow the MBR method. You are allowed to amend your current solo 401k plan to change the custodian.
Topic Author
Wimpy
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Re: Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

tashnewbie wrote: Wed Oct 13, 2021 10:42 am Welcome to the forum, Wimpy!!

You said the contributions to the solo 401k were "post-tax."

Does that mean the contributions were Roth 401k contributions?

Or were they after-tax non-Roth contributions?

In general, the MBDR is 2 steps. The ability to do the MBDR is plan-dependent. Some 401k plans don't allow after-tax non-Roth contributions, and they vary on which option is available for the second step. These are the steps:

1. After-tax, non-Roth contribution to 401k
2. In-plan Roth rollover/conversion to Roth 401k or in-service non-hardship withdrawal to Roth IRA (of the after-tax, non-Roth contributions)
Sorry for the confusion, up until midway through 2020, I was contributing to the solo 401k. Starting part of the way through 2020 is when I started with post tax contributions to the Individual 401k. The other contributions for 2020, $26500 in Roth 401k.
Topic Author
Wimpy
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Re: Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

Thank you, Duckie.

By "post tax" do you mean Roth 401k or after-tax non-Roth 401k? While both are post-tax they are not the same thing.
I meant after-tax non-Roth 401k


As noted by tashnewbie:

The ability to do the MBDR is plan-dependent. Some 401k plans don't allow after-tax non-Roth contributions, and they vary on which option is available for the second step.

I hope to hear from my current CFP.
HomeStretch
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Re: Individual 401k to a Mega Back Door Roth?

Post by HomeStretch »

Wimpy wrote: Wed Oct 13, 2021 7:50 pm … up until midway through 2020, I was contributing to the solo 401k. Starting part of the way through 2020 is when I started with post tax contributions to the Individual 401k. The other contributions for 2020, $26500 in Roth 401k.
Your explanation isn’t really clear to me. As Duckie mentioned already, a Solo 401k and an Individual 401k are the same self-employed 401k plan.

A business can only sponsor one Solo/Individual 401k plan. Did you amend plan #1 to plan #2 at another provider and transfer all plan assets from provider #1 to provider #2?

The no/low-cost prototype plans offered by mainstream providers like Vanguard, Schwab, Fidelity, etc. don’t allow employee after-tax (non Roth) contributions that can be converted to Roth (aka a mega backdoor Roth (MBR)).

Is your CFP administering plan #2 (if that’s allowed) or are you using a plan administered by a third party administrator (TPA) for a fee that was recommended to you by your CFP? If yes, you need to read your plan document / talk to your CFP or TPA to see if the plan allows a MBR.

More importantly, if you are in the process of leaving your CFP (without telling the CFP) and your CFP was somehow involved in administering the plan, you need to be sure you understand how to maintain the 401k plan post-CFP.
Topic Author
Wimpy
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Re: Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

Thanks HomeStretch - Sorry for the confusion.

I do have a Solo 401k and have contributed to that in the past.

Starting in 2020 I started contributing to a post-tax non-roth 401k. The reason I was given for this was at the time of withdrawl only yhe gains would be taxable. Perhaps I am using the wrong nomenclature :oops:
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Duckie
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Re: Individual 401k to a Mega Back Door Roth?

Post by Duckie »

Wimpy wrote: Thu Oct 14, 2021 12:27 pm I do have a Solo 401k and have contributed to that in the past.

Starting in 2020 I started contributing to a post-tax non-roth 401k.
Is the second 401k through W-2 employment?
retiredjg
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Re: Individual 401k to a Mega Back Door Roth?

Post by retiredjg »

Wimpy, welcome to the forum. :happy

To help you get straight about what you have, here are some different things a solo or individual 401k can have:
  • -An account that receives employee pre-tax elective deferrals ($19.5k + $6.5k catch up) - this is often called "traditional" 401k.

    -An account that receives employee Roth 401k elective deferrals (same $26k as above, shared between the two of these types of contribution)

    -An account that receives employer contributions - always pre-tax

    -An account that receives employee after tax (but not Roth) contributions - this is uncommon and requires a plan from only certain providers - you should know if you have this type of plan and who has provided you the plan documents.
All of these are inside the same 401k plan. You cannot have several 401k plans for the same employment at the same time.

With that information in mind, what do you have?

Who provided the plan documents for you?
retiredjg
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Re: Individual 401k to a Mega Back Door Roth?

Post by retiredjg »

Wimpy wrote: Wed Oct 13, 2021 10:06 am My CFP thought it would be prudent to put money into Individual 401k starting last year. The contributions were post tax and he thought this would give me a tax advantage at the time of conversion to Roth.
I think it is possible this is not an "individual 401k" but might be an Individual Retirement Account (IRA) instead. That would make some sense. What you are telling us does not make a lot of sense.
sailaway
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Re: Individual 401k to a Mega Back Door Roth?

Post by sailaway »

OP, the reason that we seem confused is because if you put in after tax, non Roth monies and leave it there, you are now required to pay your marginal rate on the gains, rather than capital gains. That will only make sense if you leave it in tax deferred until you are in a lower tax bracket than your current capital gains tax bracket OR make the conversion during the next crash, assuming it crashed far enough for your gains to be erased. Otherwise, a taxable account would have been preferable.

My husband is actually faced with this. He recharacterized a Roth contribution to non deductible traditional the year before we got married because he had made too much. But he did not know to then convert it to Roth as soon as possible, and by the time we did know that, it had already doubled, and he was in a high tax bracket.

It is also confusing because you refer to a solo 401k and an individual 401k as two separate accounts. However, you can only have one 401k per EIN, so it should be an either/or with the only differences between a solo 401k and an individual 401k being what the provider calls it (they refer to the same set of rules). The after tax non Roth contributions should be on top of the tax advantaged contributions, not in place of them. Did you make the 19500 deferral, plus employer contributions and then fill the remainder with after tax non Roth?
HomeStretch
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Re: Individual 401k to a Mega Back Door Roth?

Post by HomeStretch »

Wimpy wrote: Thu Oct 14, 2021 12:27 pm Thanks HomeStretch - Sorry for the confusion.

I do have a Solo 401k and have contributed to that in the past.

Starting in 2020 I started contributing to a post-tax non-roth 401k. The reason I was given for this was at the time of withdrawl only yhe gains would be taxable. Perhaps I am using the wrong nomenclature :oops:
Sorry, but it’s not any clearer for me. May I suggest that you pull out the plan documents/account statements for each plan/account and tell us for each plan/account:
1. Who is the provider and plan administrator for each
2. What type of plan or account it is (it’s likely part of the account name on the statement or stated in the plan adoption agreements).
3. Is the same business the sponsor for each plan?
4. Do you currently have a $ balance in each plan/account?

If you really have two Solo/Individual 401k plans (I’m not yet convinced you do) and the answer is “yes” to Q3 & Q4, that is an issue that needs to be corrected as one business cannot sponsor two Solo/Individual 401k plans for you at the same time.

It’s in your best interest to understand everything about your financial matters. Don’t rely on others to understand it and explain it to you. It’s too easy to have an issue and ultimately you will be the one who has to deal with any repercussions due to errors. CFPs, CPAs, paid tax preparers, etc. are not infallible. I suggest you hold off on leaving your CFP until this is figured out.
Topic Author
Wimpy
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Re: Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

retiredjg wrote: Thu Oct 14, 2021 3:35 pm
Wimpy wrote: Wed Oct 13, 2021 10:06 am My CFP thought it would be prudent to put money into Individual 401k starting last year. The contributions were post tax and he thought this would give me a tax advantage at the time of conversion to Roth.
I think it is possible this is not an "individual 401k" but might be an Individual Retirement Account (IRA) instead. That would make some sense. What you are telling us does not make a lot of sense.
Hello retirejg, My apologies for the confusion and thank you for your thoughtful posts. I confirmed this morning with my CFP that it is an Individual IRA. Per his information it is not convertible to an MBDR.
sailaway
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Re: Individual 401k to a Mega Back Door Roth?

Post by sailaway »

Wimpy wrote: Fri Oct 15, 2021 10:19 am I confirmed this morning with my CFP that it is an Individual IRA. Per his information it is not convertible to an MBDR.
An MBR is not a thing, it is a process. You can convert your non deductible tIRA contributions to Roth IRA, but you must be aware of the pro rata rule. For example, have you ever made any deductible tIRA contributions? How much growth is there? Do you have a 401k that accepts rollovers? Are there any restrictions on those rollovers?

One more clarification: Is this a SEP IRA? That doesn't change the rules much, but it does change your contribution limits, which you mentioned as being fairly high. You can read more here: https://www.irs.gov/retirement-plans/re ... rding-seps
Topic Author
Wimpy
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Re: Individual 401k to a Mega Back Door Roth?

Post by Wimpy »

It’s in your best interest to understand everything about your financial matters. Don’t rely on others to understand it and explain it to you. It’s too easy to have an issue and ultimately you will be the one who has to deal with any repercussions due to errors. CFPs, CPAs, paid tax preparers, etc. are not infallible. I suggest you hold off on leaving your CFP until this is figured out.
[/quote]

Thank you HomeStretch that is exactly what I will be doing!
mikejuss
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Re: Individual 401k to a Mega Back Door Roth?

Post by mikejuss »

My take: convert all posttax contributions, but do not convert any pretax contributions.
sailaway
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Re: Individual 401k to a Mega Back Door Roth?

Post by sailaway »

mikejuss wrote: Fri Oct 15, 2021 10:50 am My take: convert all posttax contributions, but do not convert any pretax contributions.
That is only possible if you can roll the pretax contributions and all of the gains to a non IRA plan. If there is any balance in any tIRA owned by the individual, the pro rata rule will apply.
mikejuss
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Re: Individual 401k to a Mega Back Door Roth?

Post by mikejuss »

sailaway wrote: Fri Oct 15, 2021 10:51 am
mikejuss wrote: Fri Oct 15, 2021 10:50 am My take: convert all posttax contributions, but do not convert any pretax contributions.
That is only possible if you can roll the pretax contributions and all of the gains to a non IRA plan. If there is any balance in any tIRA owned by the individual, the pro rata rule will apply.
Not sure I follow--I'm saying don't touch any pretax contributions to a 401(k). Posttax contributions to a 401(k) can be rolled directly into a Roth IRA without passing through a traditional IRA, I believe.
sailaway
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Re: Individual 401k to a Mega Back Door Roth?

Post by sailaway »

mikejuss wrote: Fri Oct 15, 2021 10:54 am
sailaway wrote: Fri Oct 15, 2021 10:51 am
mikejuss wrote: Fri Oct 15, 2021 10:50 am My take: convert all posttax contributions, but do not convert any pretax contributions.
That is only possible if you can roll the pretax contributions and all of the gains to a non IRA plan. If there is any balance in any tIRA owned by the individual, the pro rata rule will apply.
Not sure I follow--I'm saying don't touch any pretax contributions to a 401(k). Posttax contributions to a 401(k) can be rolled directly into a Roth IRA without passing through a traditional IRA, I believe.
OP has confirmed that they were never talking about a 401k, but rather an IRA, probably SEP IRA. or not, since that doesn't seem to be a thing, I was just going by the size of the contributions...
Last edited by sailaway on Fri Oct 15, 2021 6:37 pm, edited 1 time in total.
HomeStretch
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Re: Individual 401k to a Mega Back Door Roth?

Post by HomeStretch »

OP, what type of IRA is this to which you made high-dollar post-tax contributions?

It can’t be a SEP IRA as suggested as post tax contributions are not allowed.
retiredjg
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Re: Individual 401k to a Mega Back Door Roth?

Post by retiredjg »

Wimpy wrote: Fri Oct 15, 2021 10:19 am
retiredjg wrote: Thu Oct 14, 2021 3:35 pm
Wimpy wrote: Wed Oct 13, 2021 10:06 am My CFP thought it would be prudent to put money into Individual 401k starting last year. The contributions were post tax and he thought this would give me a tax advantage at the time of conversion to Roth.
I think it is possible this is not an "individual 401k" but might be an Individual Retirement Account (IRA) instead. That would make some sense. What you are telling us does not make a lot of sense.
Hello retirejg, My apologies for the confusion and thank you for your thoughtful posts. I confirmed this morning with my CFP that it is an Individual IRA. Per his information it is not convertible to an MBDR.
So it appears you have the Solo 401k that you've had all along and you also have an IRA.

What kind of IRA is it? When was your first contribution to the IRA? How much did you contribute this year?

A point of confusion - you seem to say you put a lot of money into the IRA, but the limit is $6k a year ($7k if over age 50) so I don't think money is going where you think.

It appears you are somewhat confused about what kinds of accounts you have and how much money you are putting into them. Getting this straight is critical to answering any of your questions.

Nobody here can tell you anything worthwhile until you and we know what you actually have. This will take some work on your part but we cannot do anything without it.

Where is the Solo 401k held? Who is the administrator for this 401k account?

You can start learning about different types of retirement accounts in the Wiki.

https://www.bogleheads.org/wiki/IRA

https://www.bogleheads.org/wiki/Solo_401(k)_plan
retiredjg
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Re: Individual 401k to a Mega Back Door Roth?

Post by retiredjg »

Here is some more information that may help you sort this all out.

1. If your income is too high to contribute directly to Roth IRA, some people use what is called the "backdoor Roth" process to get money into Roth IRA each year.

It is two steps...
  • a) put $6k into traditional IRA; this is a non-deductible contribution to tiRA.

    b) Convert the tIRA to Roth IRA.
It is possible this is why someone suggested you do this mystery after-tax contribution this year. Note that this process does not work right if you have other money in IRA (same IRA or another traditional IRA).



2. There is a similar process that some people can use that involves making after-tax contributions to 401k (not an IRA). This has come to be known as the "mega-backdoor Roth" process.

For a Solo 401k, it takes special plan documents to do this - it is highly unlikely that you have such a plan without knowing it so I doubt that is what was being considered for you.
mikejuss
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Re: Individual 401k to a Mega Back Door Roth?

Post by mikejuss »

A minor historical query: how long have backdoor Roth contributions been a loophole in the tax code? I seem to remember reading somewhere that they began in the early aughts, but I can't confirm this. Just curious.
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Duckie
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Re: Individual 401k to a Mega Back Door Roth?

Post by Duckie »

mikejuss wrote: Sat Oct 16, 2021 10:25 am A minor historical query: how long have backdoor Roth contributions been a loophole in the tax code?
The possibility came into existence in 2010 when the income cap on Roth IRA conversions was lifted. Prior to that you couldn't convert if your AGI was over $100,000.
mikejuss
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Re: Individual 401k to a Mega Back Door Roth?

Post by mikejuss »

Duckie wrote: Sat Oct 16, 2021 12:26 pm
mikejuss wrote: Sat Oct 16, 2021 10:25 am A minor historical query: how long have backdoor Roth contributions been a loophole in the tax code?
The possibility came into existence in 2010 when the income cap on Roth IRA conversions was lifted. Prior to that you couldn't convert if your AGI was over $100,000.
Thank you. That's really interesting. I'm eager to see if the loophole is closed (but I won't speculate about that here).
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