Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

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Spirit Rider
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Spirit Rider »

Since it is an after-tax contribution, I can think of two possible ways to handle this Paychex inability to process this as an after-tax contribution* without Paychex's cooperation.

Since any payroll system can generally direct deposit multiple amounts to different ACH routing/account numbers.
  • The simplest thing to do is direct deposit to the employee after-tax account at your custodian.
  • Alternatively, direct deposit it back to S-Corp's business account and deposit it in the employee after-tax account at your custodian.
A great many employer's now offer employee after-tax contributions. Paychex is one of the largest payroll processors. I find it hard to believe they don't offer this capabily.
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

To add on to what Spirit Rider said, you should ask Paychex if you can setup a "post taxes calculation deduction" and have that deduction sent to a particular bank account owned by the business. This should be no different then a post taxes calculation deduction for life insurance or disability insurance, etc.
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

Soon2BXProgrammer wrote: Wed Nov 18, 2020 5:08 pm
aatashp wrote: Wed Nov 18, 2020 5:05 pm Thank you Soon2BXProgrammer, ICM and retiredjg.

My biggest gripe with EF is they charge based on AUM and that matters for me since I will be rolling over $100k of tIRAs into Solo 401k. This probably does not affect others who don't need to rollover tIRAs. My current W2 employer 401k accepts rollover of tIRAs but the investment options are not that great. What would be a good suggestion given my situation?
Decide what is worse. the AUM charge or your current 401k, and move the money to the least bad place.

But why do you need to roll over the TIRA? unless you are trying to do a normal backdoor IRA in addition to the mega backdoor roth? or? why are you rolling the IRA over?
I thought tIRAs have to be out of the way for MBR. Thank you all for clarifying and educating me that it is not the case.
How about SEP-IRA? I have a SEP-IRA from 2019. Do I keep SEP-IRA as is as well?

So, if I execute MBR and roll over the after-tax money into Roth IRA, there should not be any funds left in Solo 401k for EF to charge fees based on AUM. Correct?
retiredjg
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by retiredjg »

aatashp wrote: Thu Nov 19, 2020 10:44 am
retiredjg wrote: Wed Nov 18, 2020 5:23 pm Another approach would be to use a real TSP such as EF for a few years. After that, you may find you know enough to do it yourself.
I thought tIRAs have to be out of the way for MBR. Thank you all for clarifying and educating me that it is not the case.
How about SEP-IRA? I have a SEP-IRA from 2019. Do I keep SEP-IRA as is as well?

So, if I execute MBR and roll over the after-tax money into Roth IRA, there should not be any funds left in Solo 401k for EF to charge fees based on AUM. Correct?
The SEP IRA will not interfere if you do it correctly - roll the whole after-tax 401k account directly into Roth IRA.

Can't help with the other question other than to guess they have some kind of minimum charge even when the account is empty.
vm81
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by vm81 »

Spirit Rider wrote: Thu Nov 19, 2020 12:15 am Since it is an after-tax contribution, I can think of two possible ways to handle this Paychex inability to process this as an after-tax contribution* without Paychex's cooperation.

Since any payroll system can generally direct deposit multiple amounts to different ACH routing/account numbers.
  • The simplest thing to do is direct deposit to the employee after-tax account at your custodian.
  • Alternatively, direct deposit it back to S-Corp's business account and deposit it in the employee after-tax account at your custodian.
A great many employer's now offer employee after-tax contributions. Paychex is one of the largest payroll processors. I find it hard to believe they don't offer this capabily.
Thank you Spirit Rider and Soon2BXProgrammer,

I am stunned as well that 2 agents at Paychex have no idea what this is all about. They are trying to get more answers. They asked me whats the correct coding for this deduction and how should it show up on w-2. I am hoping they can figure this out in next day or two.

I am not sure if Direct Deposit at EF is going to happen. I will check with them but my understanding in discussions with them is that they usually pull from bank account. If there is no way to do direct deposit - then will try your alternative method of depositing it back into S-Corp business account.

Soon2BXProgrammer: If they do that - dont they have to still code it somehow on W-2? Does it get coded in any particular way?
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

vm81 wrote: Thu Nov 19, 2020 11:39 am Soon2BXProgrammer: If they do that - dont they have to still code it somehow on W-2? Does it get coded in any particular way?
pretax 401k deductions show up on the W-2 as box 12 code D which reduce box 1 wages.
aftertax paycheck deductions do NOT show up in box 12 as any code, and they do not reduce box 1/3/5.

in your books you need to show that your company doesn't actually "own" the aftertax deductions and you are holding them on behalf of your employees until the deposit is made to their 401k. (either label the money in your books if the payroll provider doesn't pull the money at all, or redeposits it to a different account as of the date of payroll)
Last edited by Soon2BXProgrammer on Thu Nov 19, 2020 12:16 pm, edited 5 times in total.
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ICMoney
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by ICMoney »

retiredjg wrote: Thu Nov 19, 2020 11:18 am
aatashp wrote: Thu Nov 19, 2020 10:44 am
So, if I execute MBR and roll over the after-tax money into Roth IRA, there should not be any funds left in Solo 401k for EF to charge fees based on AUM. Correct?
Can't help with the other question other than to guess they have some kind of minimum charge even when the account is empty.
I have never had my EF account totally empty so not completely sure. I don't have a large amount in there now and am only getting the small AUM, plus $500/year fee. EF may charge you a couple bucks of AUM for the couple days the after tax contributions are in the account prior to the rollover. Since you are paying them $500/year anyway, plus $50 per rollover, as long as you keep paying these amounts they would still keep the account open I would think.

Best, ICM
vm81
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by vm81 »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:06 pm
vm81 wrote: Thu Nov 19, 2020 11:39 am Soon2BXProgrammer: If they do that - dont they have to still code it somehow on W-2? Does it get coded in any particular way?
pretax 401k deductions show up on the W-2 as box 12 code D which reduce box 1 wages.
aftertax paycheck deductions do NOT show up in box 12 as any code, and they do not reduce box 1/3/5.

in your books you need to show that your company doesn't actually "own" the aftertax deductions and you are holding them on behalf of your employees until the deposit is made to their 401k. (either label the money in your books if the payroll provider doesn't pull the money at all, or redeposits it to a different account as of the date of payroll)
Thank you for this. So after tax contributions dont show up in Box 12. Do they not show up on w2 at all? Not even box 14?
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

vm81 wrote: Thu Nov 19, 2020 3:01 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:06 pm
vm81 wrote: Thu Nov 19, 2020 11:39 am Soon2BXProgrammer: If they do that - dont they have to still code it somehow on W-2? Does it get coded in any particular way?
pretax 401k deductions show up on the W-2 as box 12 code D which reduce box 1 wages.
aftertax paycheck deductions do NOT show up in box 12 as any code, and they do not reduce box 1/3/5.

in your books you need to show that your company doesn't actually "own" the aftertax deductions and you are holding them on behalf of your employees until the deposit is made to their 401k. (either label the money in your books if the payroll provider doesn't pull the money at all, or redeposits it to a different account as of the date of payroll)
Thank you for this. So after tax contributions dont show up in Box 12. Do they not show up on w2 at all? Not even box 14?
They do not show up in box 14 either.

From a megacorp W2 that i have, it has a couple extra sections outside of the normal W2 form in a "retain for your records" section next to the copy C (employee) version of the W2:

One is a W-2 Box 1 Earnings Analysis, that basically breaks down all the additions and subtractiosn that build box 1. (no reference in this section to aftertax contributions).

Then it has an extra section listed "miscellaneous information" this section lists the aftertax contributions, a particular states industrial insurance and actually how much of box 12 code W (HSA) was from the employer (instead of a salary reduction by the employee).

I am not an expert in this but i believe this is not require/reportable information on a W2
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

retiredjg wrote: Thu Nov 19, 2020 11:18 am
aatashp wrote: Thu Nov 19, 2020 10:44 am
retiredjg wrote: Wed Nov 18, 2020 5:23 pm Another approach would be to use a real TSP such as EF for a few years. After that, you may find you know enough to do it yourself.
I thought tIRAs have to be out of the way for MBR. Thank you all for clarifying and educating me that it is not the case.
How about SEP-IRA? I have a SEP-IRA from 2019. Do I keep SEP-IRA as is as well?

So, if I execute MBR and roll over the after-tax money into Roth IRA, there should not be any funds left in Solo 401k for EF to charge fees based on AUM. Correct?
The SEP IRA will not interfere if you do it correctly - roll the whole after-tax 401k account directly into Roth IRA.

Can't help with the other question other than to guess they have some kind of minimum charge even when the account is empty.
I am not entirely clear on what I am allowed to do with MBR. Would I be able to contribute"profit sharing" in SEP-IRA and after-tax in Solo 401k with the intention to execute MBR?
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

aatashp wrote: Thu Nov 19, 2020 9:44 pm
retiredjg wrote: Thu Nov 19, 2020 11:18 am
aatashp wrote: Thu Nov 19, 2020 10:44 am
retiredjg wrote: Wed Nov 18, 2020 5:23 pm Another approach would be to use a real TSP such as EF for a few years. After that, you may find you know enough to do it yourself.
I thought tIRAs have to be out of the way for MBR. Thank you all for clarifying and educating me that it is not the case.
How about SEP-IRA? I have a SEP-IRA from 2019. Do I keep SEP-IRA as is as well?

So, if I execute MBR and roll over the after-tax money into Roth IRA, there should not be any funds left in Solo 401k for EF to charge fees based on AUM. Correct?
The SEP IRA will not interfere if you do it correctly - roll the whole after-tax 401k account directly into Roth IRA.

Can't help with the other question other than to guess they have some kind of minimum charge even when the account is empty.
I am not entirely clear on what I am allowed to do with MBR. Would I be able to contribute"profit sharing" in SEP-IRA and after-tax in Solo 401k with the intention to execute MBR?
No. Once a 401k plan is established for the company, I don't believe you qualify to use a SEP-IRA for new contributions, they will have to be employER contributions to the 401k plan. which reduce the size of the aftertax contributions you can do, because you are limited to the annual additions limit.

Effectively this means a MBR 401k is a niche product because if the business is grossing 250k+ (or so) for the owner, profit share fills the plan.

you are now beyond my knowledge of changing plans, hopefully someone else can advise.
retiredjg
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by retiredjg »

aatashp wrote: Thu Nov 19, 2020 9:44 pm I am not entirely clear on what I am allowed to do with MBR. Would I be able to contribute"profit sharing" in SEP-IRA and after-tax in Solo 401k with the intention to execute MBR?
If you open a Solo 401k for your side job, you will no longer be able to contribute to the SEP IRA for that same job. But you do not have to get rid of it either.

Your elective deferrals (the 19.5k) are going into your W2 job. If you want to make employer contributions to the Solo 401k you can do that. You can also make after-tax employee contributions to the Solo 401k. The combination of the two is limited to $58k in 2021.
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

retiredjg wrote: Fri Nov 20, 2020 7:11 am
aatashp wrote: Thu Nov 19, 2020 9:44 pm I am not entirely clear on what I am allowed to do with MBR. Would I be able to contribute"profit sharing" in SEP-IRA and after-tax in Solo 401k with the intention to execute MBR?
If you open a Solo 401k for your side job, you will no longer be able to contribute to the SEP IRA for that same job. But you do not have to get rid of it either.

Your elective deferrals (the 19.5k) are going into your W2 job. If you want to make employer contributions to the Solo 401k you can do that. You can also make after-tax employee contributions to the Solo 401k. The combination of the two is limited to $58k in 2021.
Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
retiredjg
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by retiredjg »

aatashp wrote: Fri Nov 20, 2020 9:24 am Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
That is completely up to your plan. However, with a good plan, why would you want to?
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

retiredjg wrote: Sat Nov 21, 2020 7:54 pm
aatashp wrote: Fri Nov 20, 2020 9:24 am Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
That is completely up to your plan. However, with a good plan, why would you want to?
Just so I can avoid having to pay AUM fees to Employee Fiduciary.
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

aatashp wrote: Sun Nov 22, 2020 5:57 pm
retiredjg wrote: Sat Nov 21, 2020 7:54 pm
aatashp wrote: Fri Nov 20, 2020 9:24 am Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
That is completely up to your plan. However, with a good plan, why would you want to?
Just so I can avoid having to pay AUM fees to Employee Fiduciary.
you would have to ask Employee Fiduciary if they will allow you to roll out employER contribution. They are in the business to make money so don't be surprised if they dont. its a small price to pay to get a MBR. You have to decide if the tax savings on the MBR over the long run is worth it for you. Decide if you can see the forest through the trees or not.
Spirit Rider
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Spirit Rider »

You can not "maintain*" a 5305-SEP IRA and a qualified plan (one-participant 401k) for the same tax year. However you could adopt and maintain a prototype SEP IRA at Schwab.

*A SEP IRA is considered maintained only for a tax year contributions are made. A 401k is maintained from adoption until termination.

Bottom line. If you have not made 5305-SEP IRA contributions for the 2020 tax year. You could adopt a Schwab prototype IRA and make your 2020 employer contributions to there instead of to the one-participant 401k.

Note: If your net earnings from self-employment (earned income) = (business profit - 1/2 SE tax) < the annual addition limit (2020 = $57K) and you make employer contributions. Your maximum employee after-tax contributions = SE earned income - (employer contributions * 2).
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

Soon2BXProgrammer wrote: Sun Nov 22, 2020 6:00 pm
aatashp wrote: Sun Nov 22, 2020 5:57 pm
retiredjg wrote: Sat Nov 21, 2020 7:54 pm
aatashp wrote: Fri Nov 20, 2020 9:24 am Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
That is completely up to your plan. However, with a good plan, why would you want to?
Just so I can avoid having to pay AUM fees to Employee Fiduciary.
you would have to ask Employee Fiduciary if they will allow you to roll out employER contribution. They are in the business to make money so don't be surprised if they dont. its a small price to pay to get a MBR. You have to decide if the tax savings on the MBR over the long run is worth it for you. Decide if you can see the forest through the trees or not.
Makes sense. I like the way you put it. It still makes sense for me to make pre-tax employER contribution.

Need one more clarification - Does IRS allow 25% for unincorporated individual self-employed profit sharing (employER contribution) for the sole proprietor? I know 25% is allowed for incorporated business but that is not the case for me. I could not find any definitive information whether I can make 25% (versus 20%) employER contribution.
Soon2BXProgrammer
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Soon2BXProgrammer »

aatashp wrote: Sun Nov 22, 2020 10:05 pm
Soon2BXProgrammer wrote: Sun Nov 22, 2020 6:00 pm
aatashp wrote: Sun Nov 22, 2020 5:57 pm
retiredjg wrote: Sat Nov 21, 2020 7:54 pm
aatashp wrote: Fri Nov 20, 2020 9:24 am Thank you @retiredjg for the clarification. Would I be able to rollover the employer contribution to IRA? Is that a good strategy?
That is completely up to your plan. However, with a good plan, why would you want to?
Just so I can avoid having to pay AUM fees to Employee Fiduciary.
you would have to ask Employee Fiduciary if they will allow you to roll out employER contribution. They are in the business to make money so don't be surprised if they dont. its a small price to pay to get a MBR. You have to decide if the tax savings on the MBR over the long run is worth it for you. Decide if you can see the forest through the trees or not.
Makes sense. I like the way you put it. It still makes sense for me to make pre-tax employER contribution.

Need one more clarification - Does IRS allow 25% for unincorporated individual self-employed profit sharing (employER contribution) for the sole proprietor? I know 25% is allowed for incorporated business but that is not the case for me. I could not find any definitive information whether I can make 25% (versus 20%) employER contribution.
the calculation is actually a bit involved. the best spreadsheet i'm aware of is from the financial buff (tbf on this forum):

https://thefinancebuff.com/solo-401k-fo ... yment.html
aatashp
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by aatashp »

The tfb spreadsheet for unincorporated is setup with 25% profit sharing. Has anyone used 25% for their calculations as a sole-proprietor?
Spirit Rider
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Re: Employee Fiduciary Solo 401(k) with MegaBackdoor Roth and TPA - Discussion

Post by Spirit Rider »

This is related to what I have been trying to get you to understand. The maximum employer contribution rate for all types of businesses is 25% of compensation.

However, as I have been repeatedly pointing out. Self-employed employer contributions are not compensation and are not included in compensation. For this reason, a self-employed individual's employer contribution is calculated as 20% * self-employed earned income.

Here is an example. You self-employed earned income = $100K. Your maximum employer calculation = $100K * 20% = $20K. Your compensation = $100K - $20K = $80K. You can check the $20K is correct by $80K * 25% = $20K.

You should really start over and refer to Schedule SE and it's instructions and IRS Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Especially, Chapter 5. Table and Worksheets for the Self-Employed. The Deduction Worksheet for Self-Employed and the Rate Table for Self-Employed.
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