Do I need a Solo 401k / Mega back door Roth plan?

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onthecusp
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Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Tue Jun 30, 2020 8:34 pm

I’m probably moving from full time work to part time before full retirement, leaving the corporate life. :D It will be a more flexible part time consulting position where I will be a 1099 worker / sole proprietor for about 3 years making about 140,000/yr. I intend to save a more for retirement but I don’t believe I need to in order to meet our needs.

There have been a few useful threads recently for people moving to 1099 work so I feel pretty well informed on the basic tax, insurance, and Sole Proprietor (SP) vs LLC issues. I want to focus on things like my near term options for solo 401k and Mega Backdoor Roth contributions.

I had planned to make the jump to part time in April but when Covid-19 hit I decided to hold off to let things stabilize (both in the market and in my target situation), and invest more during the downturn. Doing so has restored the investments and confidence back to a point where I'm comfortable with the above plan again. I also preserved insurance coverage, from here I expect to buy Cobra upon leaving, which will get me to within a few months of Medicare coverage. That is covered in my spending projections.

I’m hoping to get a push, a financial reason to go soon, but I’ll settle for the usual good advice on optimizing what I’m going to do anyway. High level advice on what is worthwhile would help a lot.

Here, half way through the year I have maxed out my normal and catchup 401k limits. So I will probably be missing out on matching contributions from here on. I increased the contributions to the max in January thinking I would be gone by now.

• If I make this move soon, can I establish and save anything in a solo 401k this year? If not, since I already maxed out my current plan, should I establish the solo 401k immediately or just wait till next year?
• Who sets up plans like this? Fidelity? The CPA who does my taxes?
• Is there an advantage to solo 401k versus maxing IRA contributions? I’m not sure at this point how much I will be saving. Should I define that better?
• What about the Mega Backdoor Roth? I'm so out of touch with this I hardly know where to start. I know there are many threads and a wiki entry on how to do it. Is this even a good idea at this point? My retirement funds are currently about 30% taxable, 30% IRA, and 40% 401k.
• A 3 fund portfolio in taxable is my backup plan for any excess funds at this point. Or adding more to the mortgage payment (3%).
• Anything else I’m missing in this vein, better options?

Thanks for any ideas.

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Wed Jul 01, 2020 9:47 am

onthecusp wrote:
Tue Jun 30, 2020 8:34 pm
• If I make this move soon, can I establish and save anything in a solo 401k this year? If not, since I already maxed out my current plan, should I establish the solo 401k immediately or just wait till next year?
You have maxed your employee elective deferral amount (The 19.5k) for this year. You could contribute to Solo 401k as the employer (up to $56kish). You could contribute to the after-tax (not the Roth) account as an employee.

• Who sets up plans like this? Fidelity? The CPA who does my taxes?
There are many (Vanguard, Fido, Schwab, etc) who offer Solo 401k. There are only a few who offer the ability to use the Mega back door (none of the big guys) and only one that I know of that will administer such a plan.

• Is there an advantage to solo 401k versus maxing IRA contributions? I’m not sure at this point how much I will be saving. Should I define that better?
You can save more in the Solo 401k. However, if you already have a very large tax-deferred account, that might not be of much benefit to you unless you use Roth 401k. Yes, you should define that better.

• What about the Mega Backdoor Roth? I'm so out of touch with this I hardly know where to start. I know there are many threads and a wiki entry on how to do it. Is this even a good idea at this point? My retirement funds are currently about 30% taxable, 30% IRA, and 40% 401k.
Here we go into the minefield. There are a couple of online sites that offer the documents to so MBD with a solo. There is an initial start up cost and an annual fee to keep the documents up to date. These sites do not administer the plans. You would have to do that yourself and most people do not know enough to to that properly. However, there are several people here who are doing that and feel they are capable.

There is one place (Employee Fiduciary) that will sell you both the plan document and act as your third party administrator (TPA). Obviously, they cost more.

Here is an article you might find helpful. I'm not sure when it was last updated. Be sure to read the link to the previous article (Elusive...). http://thefinancebuff.com/after-tax-con ... -401k.html


Before you get started, determine if you already have an adequate tax-deferred account. If you do not need any more in tax-deferred, I'd put money into taxable or Roth instead. Or pay off debt. If you decide to use the Solo with Mega Back Door capabilities, be sure you are ready and able to either pay for administration or try to do it yourself.

HomeStretch
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by HomeStretch » Wed Jul 01, 2020 10:45 am

A self-employed 401k plan could be worthwhile for you if:
1) you will be self-employed and earning $140k per year,
2) willing to self-administer (N/A if you use ENp liter Fiduciary)
3) are maxing out your (and spouse’s?) IRA space
4) have $ to contribute and/or if you want to shift Taxable savings to Roth savings

The mainstream provider plans (no MBR option) are no cost at Fidelity, eTrade, etc. or low cost at Vanguard (there was a low fee for something but don’t recall what it is). For a plan with a MBR option (for example, a plan offered by Employee Fiduciary), you will pay set-up and annual admin fees. If you don’t have enough cash flow to contribute to a MBR plan, you can use proceeds from your Taxable account to fund it thus shifting Taxable savings to Roth savings that will grow tax free.

The self-employed 401k plans recommended by CPAs I see discussed in BH posts often are non-mainstream sub-optimal plans as I suspect those plans may pay a commission or referral fee to the CPA. Or the CPA may charge to help set up the plan.

If you go with a TPA plan, when you stop working consider amending the plan (and transferring the plan assets) to a no-cost provider’s plan or terminate the plan (and rollover the balances to IRA(s)) in order to eliminate the annual TPA fee.
Last edited by HomeStretch on Fri Jul 03, 2020 4:11 pm, edited 2 times in total.

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Wed Jul 01, 2020 11:20 am

HomeStretch wrote:
Wed Jul 01, 2020 10:45 am
For a plan with a MBR option, you will pay set-up and annual admin fees but will not have to self-administer.
Is that what you meant to say? Unless something has changed, I don't think that is right.

HomeStretch
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by HomeStretch » Wed Jul 01, 2020 12:38 pm

retiredjg wrote:
Wed Jul 01, 2020 11:20 am
HomeStretch wrote:
Wed Jul 01, 2020 10:45 am
For a plan with a MBR option, you will pay set-up and annual admin fees but will not have to self-administer.
Is that what you meant to say? Unless something has changed, I don't think that is right.
Thanks, I’ll correct that in my post. When I talked to Employee Fiduciary, I discussed both a Solo 401k and a 401k plan covering (non-spouse) employee. TPA services were available for the latter.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Wed Jul 01, 2020 12:40 pm

retiredjg wrote:
Wed Jul 01, 2020 9:47 am
onthecusp wrote:
Tue Jun 30, 2020 8:34 pm
• If I make this move soon, can I establish and save anything in a solo 401k this year? If not, since I already maxed out my current plan, should I establish the solo 401k immediately or just wait till next year?
You have maxed your employee elective deferral amount (The 19.5k) for this year. You could contribute to Solo 401k as the employer (up to $56kish). You could contribute to the after-tax (not the Roth) account as an employee.

• Who sets up plans like this? Fidelity? The CPA who does my taxes?
There are many (Vanguard, Fido, Schwab, etc) who offer Solo 401k. There are only a few who offer the ability to use the Mega back door (none of the big guys) and only one that I know of that will administer such a plan.

• Is there an advantage to solo 401k versus maxing IRA contributions? I’m not sure at this point how much I will be saving. Should I define that better?
You can save more in the Solo 401k. However, if you already have a very large tax-deferred account, that might not be of much benefit to you unless you use Roth 401k. Yes, you should define that better.

• What about the Mega Backdoor Roth? I'm so out of touch with this I hardly know where to start. I know there are many threads and a wiki entry on how to do it. Is this even a good idea at this point? My retirement funds are currently about 30% taxable, 30% IRA, and 40% 401k.
Here we go into the minefield. There are a couple of online sites that offer the documents to so MBD with a solo. There is an initial start up cost and an annual fee to keep the documents up to date. These sites do not administer the plans. You would have to do that yourself and most people do not know enough to to that properly. However, there are several people here who are doing that and feel they are capable.

There is one place (Employee Fiduciary) that will sell you both the plan document and act as your third party administrator (TPA). Obviously, they cost more.

Here is an article you might find helpful. I'm not sure when it was last updated. Be sure to read the link to the previous article (Elusive...). http://thefinancebuff.com/after-tax-con ... -401k.html


Before you get started, determine if you already have an adequate tax-deferred account. If you do not need any more in tax-deferred, I'd put money into taxable or Roth instead. Or pay off debt. If you decide to use the Solo with Mega Back Door capabilities, be sure you are ready and able to either pay for administration or try to do it yourself.
I really appreciate you breaking it down. For followup I'll go last to first.

Do I have adequate tax-deferred: My RMDs will be more than I need so I guess the answer is yes. After 70 it should be approaching 30,000 and we will be needing around 15,000. I plan to do some Roth Conversions in the 5 years before 72. Maybe also some early withdrawals without rolling it into a Roth, depending on my overall income. But saving tax next year and then paying a little less in a couple years sounds good too.

The Mega Back Door seems like more complication than it will be worth to me. Thanks for the high level overview and that link. It explains it in a different way than most treatments I've read.

The solo Roth 401k is something I might explore more. I figured I was still bumping income limits. Are there higher limits in the 1099/solo world?

The regular solo 401k is sounding OK if analysis shows I can save on taxes with enough Roth conversions. That is a lot of money that can be saved, if only I wanted to work a lot more.
IRA is clearly easier for smaller amounts. I need to pull out the spreadsheet and decide on how much I can and want to convert to Roth.
Taxable (3 fund) and Mortgage are looking ok too. Taxable savings will give me more ready funds for the Roth conversions.

Thanks :sharebeer

Edited to fix a terrible sentence.
Last edited by onthecusp on Wed Jul 01, 2020 12:53 pm, edited 1 time in total.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Wed Jul 01, 2020 12:49 pm

HomeStretch wrote:
Wed Jul 01, 2020 10:45 am
A self-employed 401k plan could be worthwhile for you if:
1) you will be self-employed and earning $140k per year,
2) willing to self-administer (N/A if you pay for a MBR TPA plan such as Employee Fiduciary)
3) are maxing out your (and spouse’s?) IRA space
4) have $ to contribute and/or if you want to shift Taxable savings to Roth savings

The mainstream provider plans (no MBR option, you self-administer) are no cost at Fidelity, eTrade, etc. or low cost at Vanguard (there was a low fee for something but don’t recall what it is). For a plan with a MBR option, you will pay set-up and annual admin fes bute will not have to self-administer. If you don’t have enough cash flow to contribute to a MBR plan, you can use proceeds from your Taxable account to fund it thus shifting Taxable savings to Roth savings that will grow tax free.

The self-employed 401k plans recommended by CPAs I see discussed in BH posts often are non-mainstream sub-optimal plans as I suspect those plans may pay a commission or referral fee to the CPA.

If you go with a TPA plan, when you stop working consider amending the plan (and transferring the plan assets) to a no-cost provider’s plan or terminate the plan (and rollover the balances to IRA(s)) in order to eliminate the annual TPA fee.
Interesting points. I think I could self administer if I stay away from the Mega Backdoor Roth option, but still the current IRA might be enough for now. Good background on some of the other plans, I'll keep that in mind if I do go the solo 401k route.

My spouse has not had an IRA, but yes that is a good reminder. We have pretty much put max savings so far in other accounts. It would be a way to shelter a little more this year at least. And as long as she has income in the future.

Thanks for the thoughtful comments. :sharebeer

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Wed Jul 01, 2020 3:50 pm

onthecusp wrote:
Wed Jul 01, 2020 12:40 pm
Do I have adequate tax-deferred: My RMDs will be more than I need so I guess the answer is yes. After 70 it should be approaching 30,000 and we will be needing around 15,000. I plan to do some Roth Conversions in the 5 years before 72. Maybe also some early withdrawals without rolling it into a Roth, depending on my overall income. But saving tax next year and then paying a little less in a couple years sounds good too.
It's ok to have an RMD that is more than you actually need. You don't have to spend it all. It's not always OK to have enough RMD that it will push you into a higher tax bracket. Do you have reason to believe that $30k (and more later on) will push you into a bracket higher than 22% (which is where you will be in the years you are making a total of about $140k).

The solo Roth 401k is something I might explore more. I figured I was still bumping income limits. Are there higher limits in the 1099/solo world?
I'm not sure what you mean. There are no income limits for using Solo Roth 401k.
Last edited by retiredjg on Fri Jul 03, 2020 6:38 am, edited 1 time in total.

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Wed Jul 01, 2020 3:54 pm

onthecusp wrote:
Wed Jul 01, 2020 12:49 pm
Interesting points. I think I could self administer if I stay away from the Mega Backdoor Roth option, but still the current IRA might be enough for now. Good background on some of the other plans, I'll keep that in mind if I do go the solo 401k route.
I don't recall hearing of difficulty from people administering their own ordinary Solo 401k (that does not have the mega option).
My spouse has not had an IRA, but yes that is a good reminder. We have pretty much put max savings so far in other accounts. It would be a way to shelter a little more this year at least. And as long as she has income in the future.
Your spouse does not need income - Your spouse can contribute to IRA based on your income.

It would be good to get a Roth IRA started for each of you before age 54.9. That way, the 5 tax year clock will have finished running before you reach 59.5.

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Wed Jul 01, 2020 4:00 pm

HomeStretch wrote:
Wed Jul 01, 2020 12:38 pm
retiredjg wrote:
Wed Jul 01, 2020 11:20 am
HomeStretch wrote:
Wed Jul 01, 2020 10:45 am
For a plan with a MBR option, you will pay set-up and annual admin fees but will not have to self-administer.
Is that what you meant to say? Unless something has changed, I don't think that is right.
Thanks, I’ll correct that in my post. When I talked to Employee Fiduciary, I discussed both a Solo 401k and a 401k plan covering (non-spouse) employee. TPA services were available for the latter.
I have not talked with EF myself.

I've read here that Employee Fiduciary is the only place that will offer you a custom Solo 401k with mega-back door and they will also administer it (act as your TPA). I believe this is a relatively recent thing.

My understanding is that the other places that offer this type of plan (solo with mega) do not administer those plans. They simply provide the document and keep it updated. I thought that is what you were talking about.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Thu Jul 02, 2020 11:46 pm

retiredjg wrote:
Wed Jul 01, 2020 3:50 pm
onthecusp wrote:
Wed Jul 01, 2020 12:40 pm
Do I have adequate tax-deferred: My RMDs will be more than I need so I guess the answer is yes. After 70 it should be approaching 30,000 and we will be needing around 15,000. I plan to do some Roth Conversions in the 5 years before 72. Maybe also some early withdrawals without rolling it into a Roth, depending on my overall income. But saving tax next year and then paying a little less in a couple years sounds good too.
It's ok to have an RMD that is more than you actually need. You don't have to spend it all. It's not always OK to have enough RMD that it will push you into a higher tax bracket. Do you have reason to believe that $30k (and more later on) will push you into a bracket higher than 22% (which is where you will be in the years you are making a total of about $410k).

The solo Roth 401k is something I might explore more. I figured I was still bumping income limits. Are there higher limits in the 1099/solo world?
I'm not sure what you mean. There are no income limits for using Solo Roth 401k.
Glad we are having this conversation. I was being simplistic there regarding my concern over RMD, not really comparing the tax brackets. I'm sure the $410k in your response was a typo for $140k, and no I don't have any such reason. I expect the $30,000 (maybe more now) plus about $65,000 in joint social security income to be the vast majority of my taxable income. It might just put us over the 12% bracket into 22% but if I do some Roth conversions after I quit working altogether, I might well be able to manage that downward anyway. At any rate 22% would be the max for a small portion, so I really should be putting any savings for the next few years in tax deferred locations.

What I meant about the solo Roth 401k is that I have not explored it at all. My understanding is that currently, as a wage employee, our joint income is well over the limit to be able to contribute to a Roth. However, based on the above, it appears that using after tax money to fund a solo Roth would be paying 22% to avoid paying 12% later. Is it still worth looking at?

Thanks again for the questions and perspective.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Thu Jul 02, 2020 11:57 pm

retiredjg wrote:
Wed Jul 01, 2020 3:54 pm
onthecusp wrote:
Wed Jul 01, 2020 12:49 pm
Interesting points. I think I could self administer if I stay away from the Mega Backdoor Roth option, but still the current IRA might be enough for now. Good background on some of the other plans, I'll keep that in mind if I do go the solo 401k route.
I don't recall hearing of difficulty from people administering their own ordinary Solo 401k (that does not have the mega option).
My spouse has not had an IRA, but yes that is a good reminder. We have pretty much put max savings so far in other accounts. It would be a way to shelter a little more this year at least. And as long as she has income in the future.
Your spouse does not need income - Your spouse can contribute to IRA based on your income.

It would be good to get a Roth IRA started for each of you before age 54.9. That way, the 5 tax year clock will have finished running before you reach 59.5.
Thanks for the confirmation that I could self administer a solo 401k (Roth or not).

It appears we need to fund an IRA for my spouse.

It is a bit late to set any clock going in our 50's :shock: but I appreciate the suggestion :D .

retiredjg
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by retiredjg » Fri Jul 03, 2020 6:42 am

onthecusp wrote:
Thu Jul 02, 2020 11:46 pm
What I meant about the solo Roth 401k is that I have not explored it at all. My understanding is that currently, as a wage employee, our joint income is well over the limit to be able to contribute to a Roth. However, based on the above, it appears that using after tax money to fund a solo Roth would be paying 22% to avoid paying 12% later. Is it still worth looking at?
It sounds like using traditional 401k would be fine for you at this point.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Fri Jul 03, 2020 3:55 pm

retiredjg wrote:
Fri Jul 03, 2020 6:42 am
onthecusp wrote:
Thu Jul 02, 2020 11:46 pm
What I meant about the solo Roth 401k is that I have not explored it at all. My understanding is that currently, as a wage employee, our joint income is well over the limit to be able to contribute to a Roth. However, based on the above, it appears that using after tax money to fund a solo Roth would be paying 22% to avoid paying 12% later. Is it still worth looking at?
It sounds like using traditional 401k would be fine for you at this point.
Thanks for the guidance and suggestions.

My plan is to make the employment move within a month or so and and talk to Fidelity where all my other accounts are, about a solo 401k. I'll probably have more questions then.

HomeStretch
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by HomeStretch » Fri Jul 03, 2020 4:15 pm

onthecusp wrote:
Fri Jul 03, 2020 3:55 pm
... My plan is to make the employment move within a month or so and and talk to Fidelity where all my other accounts are, about a solo 401k. ...
Keep in mind that Fidelity’s Solo 401k does not allow Roth employee deferrals or a mega Backdoor Roth. Aside from that, I use and like their Solo 401k.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Fri Jul 03, 2020 4:37 pm

HomeStretch wrote:
Fri Jul 03, 2020 4:15 pm
onthecusp wrote:
Fri Jul 03, 2020 3:55 pm
... My plan is to make the employment move within a month or so and and talk to Fidelity where all my other accounts are, about a solo 401k. ...
Keep in mind that Fidelity’s Solo 401k does not allow Roth employee deferrals or a mega Backdoor Roth. Aside from that, I use and like their Solo 401k.
That's good to know. I've pretty well ruled out the MBD Roth for me.

I don't think the "regular" Roth offers me much, but I was going to do more math on that one. Does Fidelity let you do Roth employer deferrals?

HomeStretch
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by HomeStretch » Fri Jul 03, 2020 4:39 pm

onthecusp wrote:
Fri Jul 03, 2020 4:37 pm
HomeStretch wrote:
Fri Jul 03, 2020 4:15 pm
onthecusp wrote:
Fri Jul 03, 2020 3:55 pm
... My plan is to make the employment move within a month or so and and talk to Fidelity where all my other accounts are, about a solo 401k. ...
Keep in mind that Fidelity’s Solo 401k does not allow Roth employee deferrals or a mega Backdoor Roth. Aside from that, I use and like their Solo 401k.
That's good to know. I've pretty well ruled out the MBD Roth for me.

I don't think the "regular" Roth offers me much, but I was going to do more math on that one. Does Fidelity let you do Roth employer deferrals?
EmployER contributions are always pretax.

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onthecusp
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Re: Do I need a Solo 401k / Mega back door Roth plan?

Post by onthecusp » Fri Jul 03, 2020 5:00 pm

Got it. Time for me to do more personal investigation. Thanks for narrowing the field for me.

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