Establishing mega back door roth

[cnssvc]

My wife and I currently have SIMPLE retirement plans that we have been funding fully for over 10 years.  In addition, we each have solo 401 k plans.  All of these plans are housed at Fidelity.  We would like to rollover our SIMPLE plans to the solo 401k plans at the end of the year.  After doing so, we would each like to max out our mega back door Roths.  Is this legal?  If so, do we need to establish a particular third party administrator to allow for maximizing the traditional/roth contributions ?  Any suggestions or stepwise advise is greatly appreciated.

 

Thank you,

[jacoavlu]

What employment are yours and spouses SIMPLE IRAs from?

What income supports yours and spouses solo 401ks?

What is total income and marginal tax rate fed plus state?

[DavidGlennCPA]

@jacoavlu makes some good points.  You'll want to be extra sure your marginal tax rate on any pre-tax contributions are low enough to warrant the mega back door Roth strategy.

Determining your marginal rate is more complex then just looking at your taxable income and figuring out which bracket you're in.  I always run several scenarios with varying amounts of pre-tax contributions to figure out the marginal rate.  This takes into account things like the phase-out of the child tax credit and QBI.

Assuming it makes sense, you'll want a 401(k) plan that allows in service withdrawals and after-tax contributions (not just the $19,000 of Roth).  You will likely need to find a more specialized place that can create the plan documents and could likely keep the funds with Fidelity as the custodian.

[jacoavlu]

If marginal rate is low enough you just Roth convert the SIMPLEs to start with

If self employment income is high enough you just amend solo 401ks to E*TRADE and make pretax contributions followed by in plan Roth rollover

But specifics matter. Need more info from OP

[saildawg]

Specifics matter for sure, and we need more.  If you want a step by step guide for setting up a individual 401k Plan to perform a mega backdoor roth conversion check out this link,

https://www.whitecoatinvestor.com/forums/topic/research-into-solo-401k-with-intent-for-mega-backdoor-roth/

I lay out all the details of my process, and have a bunch of helpful links.  For me it made sense because I have a good amount of 1099 income (40-60k), in addition to being a W2 employee.  If you only have one income source and your in a high marginal bracket you are likely better to max out pretax PSP.

[cnssvc]

I one a veterinary hospital that employs my wife.  My wife is paid a w-2 of about 20 K for her work there.  I will take home 350K this year.  In addition my wife has a SE business that will generate 105k and my SE business will take in 10-12K.  Our marginal tax rate will be 32-35 % this year and our state tax rate is 5.75%.

 

Thanks,

[jacoavlu]

I’m not an expert but you might have controlled group problems. I assume the SIMPLE IRAs are from the vet hospital and you provide contributions to employees besides your wife.

If you’re >50% owner of the business then I’m pretty sure that business becomes a controlled group with any other business owned by you and or your spouse. Which would include your and spouses SE businesses.

You need a highly competent professional to advise you through this. But you might have a big mess on your hands.

[spiritrider]

@jacoavlu is correct. You have two serious serious problems.

Under controlled group family attribution rules each spouse is consider to have 100% of the ownership interest the other spouse has. This means that each spouse has 100% ownership in all businesses. This means all of your businesses are most likely a member of a controlled group. All businesses would have to be treated as if they were a single employer for retirement plan purposes.

This means there are two interrelated serious plan errors:

1. The employees of the SIMPLE IRA employer should have been covered by the 401k plan with the same employer contribution rate as you had. A standard correction for this would to allow the missed deferral amounts and make up the difference between the SIMPLE IRA employer contribution rate and the 401k employer contribution rate.


2. However, a SIMPLE IRA must be the only employer retirement in any given calendar year. This would imply that the one-participant 401k plans were not qualified from the very beginning. A standard correction for this would be to remove all one-participant 401k plan assets subject to ordinary income taxes and the 10% earl withdrawal penalty if < age 59 1/2.

I have seriously have no idea how this should be corrected. As @jacoavlu said, you urgently need to contact a retirement plan specialist. Most likely this will be a Third Party Administrator (TPA) or possibly a lawyer experienced in these issues.

A Mega Backdoor Roth should be the least of your concerns.

[cnssvc]

I was assured initially by our CPA(s) that there were no control group issues. I will look into this again though and make the necessary changes, if need be, to stay in compliance. Thanks for your insight.

[jacoavlu]

Hang around here and it seems most CPAs have poor knowledge around these plans and issues.

CPAs have what amounts to malpractice insurance for things like this right?

[White.Beard.Doc]

Once things get more complicated, general CPAs are not able to handle the complex pension rules.  You need a TPA who specializes in retirement plans.

Back when I had a solo tax deferred plan for my outside business and the other tax deferrals at my W2 job, the regular CPA handled it.  Once I started having multiple employees joining the plan, the CPA said I needed to use the pension folks at an outside firm to avoid any compliance issues embedded in the complex rules.  Our CPA recommended a firm and they have been our TPA for many years.

[jfoxcpacfp]

jacoavlu wrote:

CPAs have what amounts to malpractice insurance for things like this right?

Click to expand...

We sure do. No way can anybody expect a 100% record, same as with physicians. We’ve made our share of mistakes; fortunately, have never had to use the policy. However, my guess would be that the rate of coverage for CPAs is a good bit lower than for physicians.

As @white.beard.doc said, CPAs are not trained to have expertise in this area, nor should they be expected to know unless they have gone through training and been awarded the appropriate credentialing. The problem arises when CPAs advise clients as if they are qualified to do so instead of providing a referral to a good TPA when appropriate.