In 2020, I have worked as both a sole proprietor / individual contractor with no employees and as a W2 part-time employee. I am 41 yrs old (under 50) and will have multiple streams of income in 2020:$100K from 1099 contract work as a sole proprietor / individual contractor (from Jan 1-Apr 31)$60K from a W2 as a part-time employee (projected through the entire year from Jan 1-Dec 31)$85K in taxable short-term gains from stocks, dividends, and other investment income (projected through the entire year from Jan 1-Dec 31)Projected Total Income for 2020: $245K from all income streams I currently have 4 retirement accounts open:a Solo (Individual) 401K (new account, balance: $0)a Solo (Individual) Roth 401K (new account, balance: $0)a Traditional IRA (existing account, balance: $280,000 of which $40,000 is in gains in 2020)a Roth IRA (existing account, balance: $118,000 of which $18,000 is in gains in 2020) I would like to maximize my tax deductions this year and move as much money as possible into both after-tax and tax-deferred accounts. My question includes:Can I contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND a separate amount to my Solo (Individual) Roth 401K ? Is the max contribution limit of $57k total across BOTH the solo 401K and solo Roth 401K? Otherwise, what is the contribution limit on the Roth 401K? Can I either:(Ideally) Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $37,500 to a Mega Backdoor Roth? Or...Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $6,000 to a "regular" Roth? Or...Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $6,000 to a Traditional IRA?What can and can't i do? My goal is to deduct / defer the maximum amount possible. Note: I tried to do my research before asking this question. Here are some of the links I read:https://ttlc.intuit.com/community/other-financial-discussions/discussion/solo-401k-and-mega-backdoor-roth/00/1221029https://www.nerdwallet.com/article/investing/what-is-a-solo-401khttps://www.nerdwallet.com/blog/investing/mega-backdoor-roths-work/https://www.irs.gov/publications/p590a (I did not read the entire thing and got lost in the middle)https://www.kiplinger.com/article/retirement/t001-c000-s001-how-much-can-you-contribute-to-a-solo-401-k-2020.htmlhttps://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits Thanks for any help with this.

There is one Max contribution to ALL 401K options over all platforms ... Solo 401(k) contribution limitsThe total solo 401(k) contribution limit is up to $57,000 in 2020. There is a catch-up contribution of an extra $6,500 for those 50 or older.To understand solo 401(k) contribution rules, you want to think of yourself as two people: an employer (of yourself) and an employee (yes, also of yourself). Within that overall $57,000 contribution limit, your contributions are subject to additional limits in each role:As the employee, you can contribute up to $19,500 in 2020, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here.As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself. The limit on compensation that can be used to factor your contribution is $285,000 in 2020.Keep in mind that if you’re side-gigging, employee 401(k) limits apply by person, rather than by plan. That means if you’re also participating in a 401(k) at your day job, the limit applies to contributions across all plans, not each individual plan. At your income level making a ROTH IRA contribution will not be allowed and any traditional IRA contribution will not be deductible ... it would add to the basis. When or if you ever convert the trad IRA to a ROTH the basis portion will not be taxed a second time ... you MUST keep a copy of the form 8606 with your IRA information so you or your heirs know of the basis in the account.

K

kp79

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Solo 401K with a Solo Roth 401K and MEGA Backdoor Roth

Forum|Forum|5 years ago
October 10, 2020
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In 2020, I have worked as both a sole proprietor / individual contractor with no employees and as a W2 part-time employee. I am 41 yrs old (under 50) and will have multiple streams of income in 2020:

$100K from 1099 contract work as a sole proprietor / individual contractor (from Jan 1-Apr 31)
$60K from a W2 as a part-time employee (projected through the entire year from Jan 1-Dec 31)
$85K in taxable short-term gains from stocks, dividends, and other investment income (projected through the entire year from Jan 1-Dec 31)
Projected Total Income for 2020: $245K from all income streams

I currently have 4 retirement accounts open:

a Solo (Individual) 401K (new account, balance: $0)
a Solo (Individual) Roth 401K (new account, balance: $0)
a Traditional IRA (existing account, balance: $280,000 of which $40,000 is in gains in 2020)
a Roth IRA (existing account, balance: $118,000 of which $18,000 is in gains in 2020)

I would like to maximize my tax deductions this year and move as much money as possible into both after-tax and tax-deferred accounts.

My question includes:

Can I contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND a separate amount to my Solo (Individual) Roth 401K ? Is the max contribution limit of $57k total across BOTH the solo 401K and solo Roth 401K? Otherwise, what is the contribution limit on the Roth 401K?
Can I either:
- (Ideally) Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $37,500 to a Mega Backdoor Roth? Or...
- Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $6,000 to a "regular" Roth? Or...
- Contribute up to a max of $57K (employee + employer portion) to my Solo (Individual) 401K AND an additional $6,000 to a Traditional IRA?

What can and can't i do? My goal is to deduct / defer the maximum amount possible.

Note: I tried to do my research before asking this question. Here are some of the links I read:

Thanks for any help with this.

TurboTax Self Employed Online

Best answer by dmertz

Thank you for clarifying.

Critter-3's information regarding the 401(k) contribution limits is somewhat incorrect. The $57,000 limit for 2020 is a per plan limit, not a per individual limit. It's the $19,500 per-individual limit that applies just to employee elective deferrals and Roth contributions to all plans in which the individual participates (except for 457(b) plans which have a separate $19,500 limit).

I'm going to directly address the original questions, so some of this might repeat what has already been said:

The sum of your employee elective deferrals and Roth contributions to the solo 401(k) (traditional or Roth) and the 401(k) at your W-2 employer is $19,500. This limit is per-individual. Assuming that you contribute nothing to a plan at your W-2 employer, you can split a total of $19,500 employee elective deferral and employer contributions any way you like between the traditional and Roth accounts in the solo 401(k).

The $57,000 limit is a per-plan limit for employee and employer contributions combined, however your self-employment income of $100,000 is far from the amount that would support that much of a contribution unless your solo 401(k) plan permits after-tax contributions that would take you beyond the $19,500 of elective deferrals and Roth contributions. Assuming exactly $100,000 of net profit from self-employment, your maximum employer contribution to the solo 401(k) would be $18,587 (all to the traditional account). If the plan permits after-tax contributions (and it might since you mentioned a MEGA backdoor Roth which involves after-tax contributions to a 401(k)), you could contribute the remainder of the $57,000 limit, $18,913 as an after-tax contribution to the traditional account in the solo 401(k).

You have enough compensation to also contribute the maximum $6,000 to a traditional IRA, but with your participation in the solo 401(k) that traditional IRA contribution would be nondeductible because your AGI will be above the limit for deductibility of the traditional IRA contribution. Your AGI will be too high to be able to contribute to a Roth IRA.

If your solo 401(k) plan does not permit after-tax contributions, the maximum that you will be able to contribute is $38,087 to the solo 401(k) ($19,500 employee and $18,587 employer) and $6,000 nondeductible to a traditional IRA for a total of $44,087. If your 401(k) plan does permit after tax contributions, add to that the $18,913 that I mentioned earlier. Depending on the plan rules, you might be able to make a rollover from the after-tax sub-account to a Roth IRA, but you likely will have to leave the other amounts and any earnings on those other amounts in the solo 401(k) until you reach age 59½.

Deferring income and getting money into Roth accounts are mutually exclusive. Even if you could make a distribution of the employer contributions before age 59½, whatever deduction you got for those contributions would be offset by the taxable amount of the rollover to a Roth IRA (or an In-Plan Roth Rollover, if the solo 401(k) plan permits).

You need to read the solo 401(k) plan agreement to find out what is and is not permitted by the plan.

Critter-3

There is one Max contribution to ALL 401K options over all platforms ...

Solo 401(k) contribution limits

The total solo 401(k) contribution limit is up to $57,000 in 2020. There is a catch-up contribution of an extra $6,500 for those 50 or older.

To understand solo 401(k) contribution rules, you want to think of yourself as two people: an employer (of yourself) and an employee (yes, also of yourself). Within that overall $57,000 contribution limit, your contributions are subject to additional limits in each role:

As the employee, you can contribute up to $19,500 in 2020, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here.
As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself. The limit on compensation that can be used to factor your contribution is $285,000 in 2020.

Keep in mind that if you’re side-gigging, employee 401(k) limits apply by person, rather than by plan. That means if you’re also participating in a 401(k) at your day job, the limit applies to contributions across all plans, not each individual plan.

At your income level making a ROTH IRA contribution will not be allowed and any traditional IRA contribution will not be deductible ... it would add to the basis. When or if you ever convert the trad IRA to a ROTH the basis portion will not be taxed a second time ... you MUST keep a copy of the form 8606 with your IRA information so you or your heirs know of the basis in the account.

K

kp79Author

Thank you for the response. I did know most of those things about the solo 401K (from the links I mentioned).

I did not know that I would not qualify for a Traditional or Roth IRA at my income levels, or that the $57K was a contribution limit across all 401Ks...so thank you.

Some follow up questions:
1. I understand I can contribute up to a max of $57K (employee + employer portion) across my Solo (Individual) 401K AND Solo (Individual) Roth 401K. Assuming I can make a contribution of $40K into my 401K(s), can all of it go into the Roth 401K? or is the first $19,500 tax-deferred and have to go into the Solo (Individual) 401K?

2. To contribute to a Traditional IRA in 2020, your MAGI (modified adjusted gross income) needs to be less than $124,000. To contribute to a Roth IRA in 2020, your MAGI (modified adjusted gross income) needs to be less than $139,000
Are capital gains from investments counted in the MAGI (modified adjusted gross income) thresholds for the Traditional and Roth IRAs? If not, then my MAGI would be $100K (1099 income) + $60K (part-time W2 income). Assuming I made a contribution of 40K into my solo 401K, would my "tax basis" be reduced to $120K, so that I could contribute to the Traditional / Roth IRA?

3. If so, would I qualify for the Mega Backdoor Roth?

Thank you.

Critter-3

First you really should be talking to a local financial planner to get educated on all these retirement situations ... and where ever you have your solo 401K should also be able to explain your options.

Some follow up questions:
1. I understand I can contribute up to a max of $57K (employee + employer portion) across my Solo (Individual) 401K AND Solo (Individual) Roth 401K. Assuming I can make a contribution of $40K into my 401K(s), can all of it go into the Roth 401K? or is the first $19,500 tax-deferred and have to go into the Solo (Individual) 401K? The employEE portion can go in either account however the employER portion would go to the reg 401K only.

2. To contribute to a Traditional IRA in 2020, your MAGI (modified adjusted gross income) needs to be less than $124,000. To contribute to a Roth IRA in 2020, your MAGI (modified adjusted gross income) needs to be less than $139,000
Are capital gains from investments counted in the MAGI (modified adjusted gross income) thresholds for the Traditional and Roth IRAs? Yes they are if they are taxable on the return.

If not, then my MAGI would be $100K (1099 income) + $60K (part-time W2 income). Assuming I made a contribution of 40K into my solo 401K, would my "tax basis" be reduced to $120K, so that I could contribute to the Traditional / Roth IRA? You can always make a traditional IRA contribution ... it is the deductibility that is in question ... best advice I can give is to NOT make any contributions to any plan until you have your final numbers at the end of the year ... you have until the filing deadline to make them so don't be in a hurry where you are forced to remove excess contributions. See the info below:

Modified Adjusted Gross Income (MAGI)

The IRS uses your modified adjusted gross income (MAGI) when it comes to IRA limits. This number can be close (or identical) to your adjusted gross income (AGI). It takes your AGI and adds back certain deductions, including:

Half of any self-employment taxes
IRA contributions and Social Security
Losses from a publicly-traded partnership
Passive income or loss
Qualified tuition expenses
Rental losses
Student loan interest
The exclusion for adoption expenses
The exclusion for income from U.S. savings bonds
Tuition and fees

To calculate your modified adjusted gross income, find your AGI from your tax return. It's on line 8b of the newly redesigned Form 1040.9 Then, use Appendix B, Worksheet 1 from IRS Publication 590-A to modify your AGI for IRA purposes.

3. If so, would I qualify for the Mega Backdoor Roth? This is basically a conversion after making regular contributions ... of course a backdoor only really works if you have no basis in your 401K or traditional IRA ... please talk to someone locally for more personalized advice.

K

kp79Author

@dmertz @Critter-3

I have a separate but related question (please assume that we are still in 2020 when you’re answering this, my custodian, E*TRADE, allows for me to backdate contributions to dec 31st if you’re only a few minutes past the deadline)

I have both:

1. Solo Roth 401k

2. Solo 401k

I have self employment income of 100k for the 2020 tax year (and total income: self employment + w2 + capital gains of 250k for 2020)

Q1. Can I contribute 57k into the individual Roth 401k for 2020 tax year (for both employee and employee portion)? What would my contribution limits for the individual Roth 401k plan be?

Q2. If I don’t contribute to the individual Roth 401k:

Can I contribute 57k into the individual 401k for 2020 tax year (for both employee and employee portion)? What would my contribution limits for the individual 401k plan be?

Q3. Any thoughts on mixing and matching between the 2 accounts? What would you recommend?

many thanks..

D

dmertz

Employee

I think Q1 and Q2 have been addressed previously above. To summarize:

A1. No. The limit for Roth 401(k) contributions for 2020 is $19,500, (plus $6,500 catch-up if you are over age 59½, but the catch-up doesn't apply to you since you are 41). The limit is on the combined total of employee elective deferrals and Roth contributions, so whatever amount of employee contributions you put into the Roth 401(k) reduces the amount that you can put into the traditional 401(k). This limit applies to all of your employee contributions similar plans in aggregate (but not to 457(b) plans which have a separate limit).

A2. See A1 for the employee contribution limit. Employer contributions can only be made to the traditional 401(k). With $100k of SE income and $60k of W-2 income, your maximum employer contribution would be $18,769.

You've said that your plan does not allow after-tax contributions to the traditional 401(k) account, so the amount in A1 and this A2 are the maximum permissible, $19,500 employee (traditional and Roth combined) plus $18,769 employer (traditional). (The amount of your W-2 income as a slight effect on determining the maximum employer contribution in this case.)

A3. Tax rates are lower now than they are expected to be in the future; the tax rates are schedule to revert to the pre-218 rates in 2026. That means that Roth contributions are likely to more beneficial now than later. Since you appear to want to put the maximal permissible into in your retirement plan, putting it all into the traditional account could result in large tax bills in the future to get that money back out due to the growth being tax deferred rather than tax free. Many people fail to plan how and when they will take money out of their retirement plans; it's just as important to get an early start on that planning (now) as it is for putting money into the plans.

K

kp79Author

@dmertz

Thanks for that insights - every point you made was very helpful. It's also useful to know that Employer contributions can only be made to the traditional 401(k).

One clarification (contrary to what I had said earlier): It seems my plan DOES allow after-tax contributions to the traditional 401(k) account.
Here are the specific clauses in my plan:
* Allows Elective Deferrals
* Allows In-Plan Roth Rollovers
* Allows Direct In-Plan Roth Rollover
* Allows an outstanding loan amount be included in a Direct In-Plan Roth Rollover
* Accepts Indirect In-Plan Roth Rollovers

Do these mean the plan allows after-tax contributions? (I would assume so, I selected "yes" for every box when setting up the plan). What would my contribution limits to the EMPLOYER portion of my Individual 401k and Individual Roth 401k be in this case? (I assume EMPLOYEE limits dont change and still can be a max combined of $19,500)

Can I do this?
step 1: EMPLOYEE contributions: Put $19,500 in my Individual Roth 401k (employee portion). Put $0 in my Individual 401k (employee portion) since I have used the $19,500 limit up for the Roth 401K above
step 2: EMPLOYER contributions: Contribute $57000-$19500 = $37,500 into my Individual 401k, given my income levels? Or would it be $18,769 as you mentioned, or would it be different since my plan seems to allow after-tax contributions?
step 3: Then, immediately roll the entire EMPLOYER contribution amount from my Individual 401k into my Individual Roth 401k? (no tax deferral benefit)

Some related q's:
1. Would a MEGA BACKDOOR Roth be necessary / useful to me, to maximize my contributions to a Roth?
2. On top of all this, can I still do a regular backdoor Roth contribution of $6000 (contribute to my traditional IRA and immediately roll it over into my Roth IRA)?
3. Lastly, can I open a solo / individual 457(b) plan on top of what I am doing above to increase my retirement contributions / deferrals?