Switching solo 401k for access to Roth 401k?

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Topic Author
lmbebo
Posts: 42
Joined: Fri Jul 18, 2014 1:49 pm

Switching solo 401k for access to Roth 401k?

Post by lmbebo » Sat Jun 27, 2020 9:56 am

Hi

I'll be starting a new W2 job at the end of the summer with full max profit sharing and doing my personal contribution to that 401k.

I have some side 1099 work, hope it'll be higher as well in the fall. I have had a solo 401k with fidelity for the past 2 years. But I was wondering if I would be better off transfering my 401k to a different firm that allows a Roth 401k.

I might be mis understanding it, but I could do profit sharing pre-tax into my solo 401k (20%). Then I could put post tax dollars on profit sharing into a Roth 401k?

i.e. my profit sharing is $10,000. Would I be eligible to put $27,000 into a Roth 401k ?

DSInvestor
Posts: 11279
Joined: Sat Oct 04, 2008 11:42 am

Re: Switching solo 401k for access to Roth 401k?

Post by DSInvestor » Sat Jun 27, 2020 10:01 am

Employer profit share contributions into Solo 401k must be Traditional. They are an expense of the business.

Roth 401k contributions are always in the employee salary deferral contribution. This is true for full Roth 401k and Roth Solo 401k. If your 401k allows for Roth and Traditional contributions, then the sum of the Roth and Traditional employee salary deferral contributions cannot exceed 19.5K.

The 19.5K annual limit for employee salary deferral is shared across both 401k plans. If you max out the 401k at your main job, that leaves no room to make any employee salary deferral contributions into your Solo 401k, thus making it impossible to make any Roth employee salary deferral contributions into the Solo 401k.

Solo 401k employer profit share is calculated the same way as SEP-IRA. Using a SEP-IRA instead of Solo 401k would allow conversion to Roth IRA after the SEP-IRA contribution is made. The SEP-IRA contribution would give you a tax break and the conversion is taxable and offsets the tax break.
Last edited by DSInvestor on Sat Jun 27, 2020 10:07 am, edited 1 time in total.
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Topic Author
lmbebo
Posts: 42
Joined: Fri Jul 18, 2014 1:49 pm

Re: Switching solo 401k for access to Roth 401k?

Post by lmbebo » Sat Jun 27, 2020 10:04 am

Thanks for clearing that up

mhalley
Posts: 8308
Joined: Tue Nov 20, 2007 6:02 am

Re: Switching solo 401k for access to Roth 401k?

Post by mhalley » Sat Jun 27, 2020 10:06 am

The employee contribution is shared across all 401k accounts, but the emplyoER contribution maximum is per account.

https://www.nextgen-wealth.com/blog/mul ... k-accounts
Employee Contribution Total

The total an employee can contribute in 2020 to all 401(k) and/or 403(b) accounts in a given year is $19,500 ($26,000 if over 50).

If you have more than one account, you can split the contributions between them but the total for the year must be no more than $19,500. This rule also applies if you have more than one employer.

Total Contribution Limit

The total contribution limit for a 401(k) for you and your employer is $57,000 per year. This number includes the employee contribution, the employer match, and any employer contributions.

This IRS rule also applies to small businesses where the owner may be contributing both as an employee and an employer to their 401(k) plan. However, unlike the employee contribution rule, this rule applies to each unrelated employer separately.

What does this mean? If you have a full-time job and also own your own business, you can have two different 401(k) accounts. While your contribution as an employee to both cannot exceed $19,500 before age 50, each employer can contribute up to the $57,000 total cap.

20 Percent Employer Contributions Limit

If you own your own business, you are limited to putting in 20 percent of net earnings from self-employment into a 401(k) account. This does include the employee contribution to the retirement account.

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ICMoney
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Re: Switching solo 401k for access to Roth 401k?

Post by ICMoney » Sat Jun 27, 2020 4:12 pm

lmbebo wrote:
Sat Jun 27, 2020 9:56 am
Hi

I'll be starting a new W2 job at the end of the summer with full max profit sharing and doing my personal contribution to that 401k.

I have some side 1099 work, hope it'll be higher as well in the fall. I have had a solo 401k with fidelity for the past 2 years. But I was wondering if I would be better off transfering my 401k to a different firm that allows a Roth 401k.

I might be mis understanding it, but I could do profit sharing pre-tax into my solo 401k (20%). Then I could put post tax dollars on profit sharing into a Roth 401k?

i.e. my profit sharing is $10,000. Would I be eligible to put $27,000 into a Roth 401k ?
Another option, depending on if you are making enough in this 1099 side work to have the custom solo 401k costs be worth it, you could look into switching to a solo 401k that allows for mega backdoor Roth contributions. (Fidelity's solo 401k doesn't allow for this) If you aren't familiar with mega backdoor Roth you could search the forum for threads on solo 401ks that allow mega backdoor Roth. This can be better than doing employer profit sharing contributions as it will increase your QBI deduction.

Basically, in the solo 401k you could make annual after-tax (not Roth) contributions up to ($37,500 for 2020, minus whatever the total dollar amount of the employer matches received from your W2 job 401ks), and then immediately do an in-plan rollover to Roth or immediately roll them to your Roth IRA. Note you need to make sure how much you contribute doesn't exceed your actual 1099 net earnings, less part of your self employment taxes (use this calculator if interested: https://thefinancebuff.com/solo-401k-fo ... yment.html).

Best, ICM

Topic Author
lmbebo
Posts: 42
Joined: Fri Jul 18, 2014 1:49 pm

Re: Switching solo 401k for access to Roth 401k?

Post by lmbebo » Mon Jun 29, 2020 6:42 pm

Thanks. That was getting at what I was looking for.

My W2 employer will be maxing my 401k profit sharing of $36,500.

So W2 is $57,000 for 2020 (19.5 personal and 36.5k profit sharing). Assuming my 1099 income is $90k. 20% profit sharing is estimated at $10k. Would I be able to contribute $27k into the solo Roth 401k account? I know I'd have to find a new 401k for this to work (mysolo401k, etc).

Having a difficult time finding an answer to this part. Remaining portions of the mega back door Roth is well explained.

DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: Switching solo 401k for access to Roth 401k?

Post by DSInvestor » Tue Jun 30, 2020 10:14 am

Would your employer profit share paid by your company increase if you reduced your employee salary deferral contributions? For example, if your W-2 salary is 200K and company pays 25% profit share or 50K, they cannot pay you the full 50K if you contribute 19.5K employee salary deferral as this would exceed the 415c limit of 57K. In such an example, I wonder if you could reduce your employee salary deferral to make room for more profit share contributions.

If you reduce the employee salary deferral into the W-2 401k plan, this frees up employee salary deferral contributions to the solo 401k and if you have a Roth Solo 401k, you can make those Roth. Remember that Roth Solo 401k is really a Solo 401k that offers the option to make 3 types of contributions:
1) Roth Employee salary deferral contributions,
2) Traditional employee salary deferral contributions
3) employer profit share (always traditional)
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