The goal of this post is to walk through the steps involved in a Mega Backdoor Roth.
The maximum 401k contribution for 2023 is $66,000 or $73,500 if you are 50 years of age or older.
In order to take advantage of this strategy, the client must meet the following conditions:
- The solo 401k plan must allow for after-tax contributions.
- There can be NO eligible employees (other than owner and spouse).
- There must be enough earned income or “deemed” compensation from the self-employment to allow the after-tax contributions.
- The 401k plan is required to allow “in-plan” Roth conversions.
Here are the steps involved:
1) Calculate the client contribution
Prepare a client illustration (or just email) the client the contributions. This would include:
- Pre-tax (or Roth) employee contributions
- Profit sharing contributions (don’t forget the 6% limit)
- After-tax contributions
Confirm with client that all contributions were made (remember they are elective).
2) Confirm that brokerage accounts are open and disburse funds
Open up brokerage or bank accounts under the name of the 401k trust. There should be one account that is labeled “Pre-tax” and one account that is labeled “Roth”.
For the “after-tax” portion, write a check or wire the funds out to the Roth brokerage account.
3) Complete the required conversion form
Complete and sign the election form that will document the conversion of the after-tax contribution to the Roth account. This form should be completed and signed by the company for each year that a conversion is made. It should be retained by the company and a copy should be forwarded to Emparion.
A copy of the form is attached here:
4) Issue a 1099-R at year end
Here is the 1099-R form for reference. Make sure it is updated for the correct year.
Let’s assume that Robert Jones with the ABC Company made the following contributions for himself.
- Employee deferral = $19,500
- Profit sharing = $10,000
- After-tax contribution = $27,500
- TOTAL CONTRIBUTION = $57,000
The 1099-R should be issued for the after-tax contribution only. There is no 1099-R issued for the contribution of any funds just the conversion/rollover of the after-tax funds.