Mega Back Door Roth 401k Guru

Dear Mega Back Door Roth guru,

I am in the considering opening a Solo 401k and Roth 401K for my small business. My company is set up as an S-Corp and I am the only owner. I just read your article on the Mega Back Door Roth, and I have a couple of questions.

First let me set the stage,I am 46 years old, I expect my compensation for 2017 to be slightly higher than the $54,000 IRS overall contribution limit, I do not have any other 401k plans available to me. My goal is to max out my contributions. Since My solo401K has a Solo 401 plan which allows for after-tax contributions and in service distributions, here is my thought.

Correct me if I am wrong, I would be able to contribute $18,000 as my pre-tax compensation deferral, and using an estimated annual compensation of$54,000, my S-Corp would be able to make a pre-tax contribution on my behalf of $13,500 ($54k x 25%), for a total of $31,500 to mypre-tax Solo 401K. I would also be able to contribute $22,500 in after tax contributions, is that correct?

ANSWER:

That is correct that you would also be able to contribute $22,500 as an after-tax 401k contribution because of the "overall limit rule."

The overall limit for 401(k) plans including solo 401k plans for 2017 is $54,000, or 100% of compensation, whichever is less.

If the $22,500 is an after tax contribution, does this this portion go into my pre-tax Solo 401K account, just like the pre-tax deferrals?

ANSWER: 

Good question. Even though it is the same solo 401k plan, the after-tax 401k contributions have  to be deposited into a separate bank account under the solo 401k plan labeled "After-Tax." For example, if the name of your solo 401k plan is "Beach-cliff Solo 401k Trust," the bank account for holding the after-tax funds would be titled as follows: 

Beach-cliff Solo 401k Trust (After-Tax)

Then I can do an “in service distribution” (almost immediately after) to move the entire $54k (or just the $22,500 ?) from my pre-tax Solo 401k account to my Roth Solo 401K, or does the $22,500 get deposited directly into my Roth Solo 401K in the first place?

ANSWER:

Since it appears your plan is to have the entire $54,000 solo 401k contribution end-up in the Roth 401k, it may be best to deposit the first $18,000 to your Roth solo 401k designated account, and deposit the $36,000 difference ($54,000 - $18,000) to the after-tax solo 401k account. You can then convert the $36,000 to the Roth solo 401k. 

To learn more about the solo 401k rules, CLICK HERE.