Mingling Pre/post tax contributions for Solo 401k

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townboglehead
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Joined: Sat Nov 02, 2013 11:47 am

Mingling Pre/post tax contributions for Solo 401k

Post by townboglehead » Sun Mar 08, 2015 11:40 am

My wife is self employed and has two part time employees, each working less than 300 hrs/yr, and she works >1000 hours/yr
Vanguard only supports solo 401k plans with no employees. Thus her tax attorney set up
a 401k and Profit sharing defined contribution plan for her, which allows up to 52k per year.
The plan allows Roth contributions
We are using TD Ameritrade to act as custodian for the account and the account contains Vanguard ETFs
Her business is going well and she made income of 91k in 2014
In 2013, took her entire contribution as Roth, around 16k
We would like to put max out the plan in 2014 and would like to put in 10k as pre tax with 7500 as Roth for the 401k and around 16k as a profit sharing contribution
This keeps us just below the 33% marginal tax rate
Are we allowed to mingle both Roth and pretax contributions in a single account as long as we keep track of the basis year after year?
We would then take a percentage of pre and post basis and split accordingly when she retires and we roll it over.

Alan S.
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Location: Prescott, AZ

Re: Mingling Pre/post tax contributions for Solo 401k

Post by Alan S. » Sun Mar 08, 2015 12:01 pm

Yes, a plan that includes a designated Roth allows the participant to split deferrals in any combination between the Roth and pre tax accounts. Once pre tax contributions have lowered the marginal rate, contributing the rest to Roth is a good idea as long as the Roth portion is still being contributed at a tax rate equal or less than the expected marginal rate in retirement. Of course, estimating marginal rates in retirement with any accuracy is difficult.

Basically, the pre tax and Roth balances in the plan must be separately accounted for as they are each separate sub accounts within the plan, and when Roth 401k amounts are rolled to a Roth IRA, the 1099R must identify the contribution basis for the Roth account. That basis is then treated as regular Roth IRA contributions once in the Roth IRA. Therefore, proper accounting is required all along.

Topic Author
townboglehead
Posts: 9
Joined: Sat Nov 02, 2013 11:47 am

Re: Mingling Pre/post tax contributions for Solo 401k

Post by townboglehead » Sun Mar 08, 2015 12:14 pm

Great and Thanks so much Alan
The account at TD has just one ETF and I will continue to put pre and post $s into the single ETF, then
split accordingly based on her basis when she retires
Thanks again

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tfb
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Re: Mingling Pre/post tax contributions for Solo 401k

Post by tfb » Sun Mar 08, 2015 1:06 pm

townboglehead wrote:Are we allowed to mingle both Roth and pretax contributions in a single account as long as we keep track of the basis year after year?
Read carefully what Alan wrote. You are allowed to mingle both Roth and pretax contributions in a single *plan* but you need to account for them separately. Just tracking the basis isn't enough. You have to track the earnings too. The plan already has $X in it on Jan. 1. Now you are adding $Y say 75% pre-tax 25% Roth on March 8. The ETF pays $Z in dividends on Dec. 10. How much of this dividend belongs to pre-tax and how much to Roth? It's not that obvious unless you have a good accounting system. If you ever want two ETFs and rebalance in the account it will be even more tricky. It's just easier to open another account for Roth under the same plan.
Alan S. wrote:Basically, the pre tax and Roth balances in the plan must be separately accounted for as they are each separate sub accounts within the plan
Harry Sit, taking a break from the forums.

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