MySolo401k for Mega Backdoor Roth IRA?

[wbwh]

Does anyone here have experience with MySolo401k?  More broadly, I am looking for a SOLO 401k provider that will allow for a mega backdoor Roth IRA (i.e. one that will allow after-tax, non-Roth contributions, AND allow for in-service distributions)

This link here suggests that they are able to get this done - https://www.mysolo401k.net/mega-back-door-roth-using-solo-401k-plan/

Their listed fee is $795 to start, and $125 per year after that, which may be worth it for me.

Just to give you an idea of my situation, I am graduating residency this year.  I signed a contract to be a W2 employee at one hospital, and will earn roughly $230K/year.  This job has a 403b plan with zero matching.  I also plan on moonlighting as a 1099 contractor, and will probably be earning another $60k/year.  My plan would be to max out the $18k employee contribution to my 403b plan (with my W2 employer).  I would also then start a solo 401k for my moonlighting income, make the max "employer" profit-sharing contribution (which I understand to be ~20%), and then pile the rest of my moonlighting income into a mega backdoor roth IRA - IF I can find a solo 401k provider that will do this.  So far, my research on the larger brokerages (Vanguard, Etrade, Fidelity, TDA) shows that none of them have the features that will allow for the mega backdoor roth ira.

Any thoughts, comment, or suggestions would be appreciated.

[DMFA]

At that income bracket, are you sure you want all of those IC "employer" contributions to be post-tax?

[Dr. Mom]

I use Schwab, but am not sure if they offer what you want.  Don't overlook the benefits of tax-efficient taxable investing.  I would not be willing to pay the fees you quoted.

[litovskyassetmanagement]

wbwh wrote:

Does anyone here have experience with MySolo401k?  More broadly, I am looking for a SOLO 401k provider that will allow for a mega backdoor Roth IRA (i.e. one that will allow after-tax, non-Roth contributions, AND allow for in-service distributions)

This link here suggests that they are able to get this done – https://www.mysolo401k.net/mega-back-door-roth-using-solo-401k-plan/

Their listed fee is $795 to start, and $125 per year after that, which may be worth it for me.

Just to give you an idea of my situation, I am graduating residency this year.  I signed a contract to be a W2 employee at one hospital, and will earn roughly $230K/year.  This job has a 403b plan with zero matching.  I also plan on moonlighting as a 1099 contractor, and will probably be earning another $60k/year.  My plan would be to max out the $18k employee contribution to my 403b plan (with my W2 employer).  I would also then start a solo 401k for my moonlighting income, make the max “employer” profit-sharing contribution (which I understand to be ~20%), and then pile the rest of my moonlighting income into a mega backdoor roth IRA – IF I can find a solo 401k provider that will do this.  So far, my research on the larger brokerages (Vanguard, Etrade, Fidelity, TDA) shows that none of them have the features that will allow for the mega backdoor roth ira.

Any thoughts, comment, or suggestions would be appreciated.

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As I mentioned in other threads, this strategy is not yet recommended until further IRS guidance.  While technically you can do that, I would be cautious based on advice of several experienced TPAs who administer retirement plans.  I would ask for advice from an attorney or a TPA prior to implementing this strategy (and because there is no guidance from the IRS explicitly allowing this, you will be doing this at your own risk).

[spiritrider]

Kon Litovsky wrote:

As I mentioned in other threads, this strategy is not yet recommended until further IRS guidance.  While technically you can do that, I would be cautious based on advice of several experienced TPAs who administer retirement plans.  I would ask for advice from an attorney or a TPA prior to implementing this strategy (and because there is no guidance from the IRS explicitly allowing this, you will be doing this at your own risk).

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At the risk of being accused of hyperbole, you are beginning to sound like the Michael Kites of this issue. There are clear and compelling arguments to the contrary:

• IRS Notice 2014-54 specifically authorizes the split rollover of after-tax contributions and earnings this is based on. Earnings to a Roth IRA and earnings to a traditional IRA. After-tax contributions have always been allowed to 401k plans.


• Significant numbers of Fortune 500 companies and other large plans have amended their plans to allow after-tax contributions and in-service rollovers of those contributions necessary to effect this process. And then actively promoting this feature as a significant employee benefit.


• The custodians/administrators of these plans fully support and effect these rollovers. Even those custodians/administrators who are normally skittish about any action that is considered a gray area of tax law.


• The Obama administration proposed legislation in both of their last two budgets to prevent this process. This an administration that was never one to shy away from regulatory overreach. If there was any way for the IRS to challenge this it would have does so.


• Industry experts Ed Slott, Kaye Thomas and many others have fully blessed this process. Sorry, but I trust their views much more than yours.


• There are no reports of the IRS challenging this process on any grounds.

Personally, I feel this nothing more than FUD (Fear, Uncertainty and Doubt), without any rational justification. You are entitled to your opinion, but in my view it is nothing more than that.

[litovskyassetmanagement]

spiritrider wrote:

Kon Litovsky wrote:

As I mentioned in other threads, this strategy is not yet recommended until further IRS guidance.  While technically you can do that, I would be cautious based on advice of several experienced TPAs who administer retirement plans.  I would ask for advice from an attorney or a TPA prior to implementing this strategy (and because there is no guidance from the IRS explicitly allowing this, you will be doing this at your own risk).

Click to expand…

At the risk of being accused of hyperbole, you are beginning to sound like the Michael Kites of this issue. There are clear and compelling arguments to the contrary:

• IRS Notice 2014-54 specifically authorizes the split rollover of after-tax contributions and earnings this is based on. Earnings to a Roth IRA and earnings to a traditional IRA. After-tax contributions have always been allowed to 401k plans.


• Significant numbers of Fortune 500 companies and other large plans have amended their plans to allow after-tax contributions and in-service rollovers of those contributions necessary to effect this process. And then actively promoting this feature as a significant employee benefit.


• The custodians/administrators of these plans fully support and effect these rollovers. Even those custodians/administrators who are normally skittish about any action that is considered a gray area of tax law.


• The Obama administration proposed legislation in both of their last two budgets to prevent this process. This an administration that was never one to shy away from regulatory overreach. If there was any way for the IRS to challenge this it would have does so.


• Industry experts Ed Slott, Kaye Thomas and many others have fully blessed this process. Sorry, but I trust their views much more than yours.


• There are no reports of the IRS challenging this process on any grounds.

Personally, I feel this nothing more than FUD (Fear, Uncertainty and Doubt), without any rational justification. You are entitled to your opinion, but I my view it is nothing more than that.

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Maybe you are right.  I did see someone on Ed Slott's site write about it (not Ed Slott himself), though they always recommend asking a CPA about it. Their article mentioned employer-sponsored plans though, not solo 401k plans (for what it's worth), unless there were other articles they wrote specifically about the solo 401k.

I've asked people familiar with the issue, and they are definitely afraid of the IRS, essentially saying 'abusing' the Roth conversion is something that they think might raise the ire of the IRS.  When you either provide compliance or tax planning advice to clients it does help to be very careful because in case of an audit and a successful prosecution, the adviser is liable, and the client would be entirely correct, especially if the recommended strategy was not thoroughly vetted.

By the way, one thing that is not clear to me is why I can't convert after-tax contribution to Roth inside the plan.  Technically this is allowed, but practically nobody is doing that in their plan documents.  Why go through the trouble of moving the money to Roth IRA?  You can do in-plan Roth conversions, so why not allow in-plan after-tax conversions (subject to pro-rata rules, by the way).  That's one thing that I don't like, so doing this every year by converting after-tax to Roth does sound a bit excessive.  By the way, most plans can't add after-tax to their documents because they won't pass the required testing, however, I do believe that many are adding in-plan Roth conversions, from what I can see.  So with employer-sponsored plans, I'd like to see a document that spells out the Mega Backdoor Roth strategy by a fortune 500 company, and how exactly they recommend doing this to the participants.  There may be some differences between larger plans and solo 401k plans in that regard.

I certainly like this strategy, and I used to recommend it to everyone until I decided to wait a bit until there is some clarity regarding after-tax conversion, specifically allowing in-plan conversion without having to pull the money out every year into a Roth.  I'd like to keep the asset-protection features of a solo 401k and also limit unnecessary movement of money, so when there is a green light to do this inside the plan by the IRS (which should happen sooner than later), then Mega Backdoor Roth strategy would be just perfect.

[litovskyassetmanagement]

An encouraging update to the above post.  I actually just spoke with someone who asked an IRS person responsible for the in-plan Roth conversion notice (I believe it is one of the attorneys working for the IRS who writes various notices), and her response was that in-plan conversion of after-tax assets is legit and not an issue.  But again, I would first ask for a legal opinion from a tax attorney prior to doing this in a solo 401k plan.  Moreover, without your plan document provider signing off on this, you can't do it even if it is legal. In fact, if you can get a plan document from someone, ask them whether they can put in language explicitly allowing AFTER-TAX contributions to be converted to Roth INSIDE the plan. This would make the whole thing a lot cleaner.  And if they won't do it, ask them why not?  As of today, many TPAs are very cautious about allowing this to happen in their plan documents, and for a good reason. Yes, they are indeed afraid of any problems with the IRS, but in my opinion that's a good thing.

[spiritrider]

Kon Litovsky wrote:

I’d like to keep the asset-protection features of a solo 401k and also limit unnecessary movement of money, so when there is a green light to do this inside the plan by the IRS (which should happen sooner than later), then Mega Backdoor Roth strategy would be just perfect.

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A one-participant 401k plan is not an ERISA protected plan. A 401k must have non-owner employees to be covered by ERISA. Once you have that employee, it is no longer a one-participant plan.

Non-ERISA plans which include all one-participant (401k, SIMPLE IRA and SEP IRA) plans, do not receive asset protection under ERISA's anti-alienation provisions. However, they do receive the unlimited federal bankruptcy protection.

In fact, because of the way a few state laws are worded, one-participant 401k plans do not even receive the creditor protection provided to IRAs in the vast majority of states.

[litovskyassetmanagement]

http://www.irafinancialgroup.com/solo401kassetprotection.php

SEP and SIMPLE are IRAs, and they follow a different set of rules than a 401k.  These do not have federal protection. A 401k is a qualified retirement plan (just like SEP and SIMPLE), but an individual 401k does indeed afford asset protection and creditor protection under federal law (unlike SEP or SIMPLE).

 

[Traveldoc]

Actually, for individuals, Vanguard does have a plan you can use, it's called a "pooled account". Go to the site, type it in "search", and a PDF to set up the account will show. You need an actuary to draft the plan document, specifically stating that Roth conversion of after tax dollars is allowed in the plan. The cost for the plan document is a one time fee of about $1,400-1,800. The pooled account will be a Solo-401k with a separately opened Roth account, connected to the 401 (so if you already have a Roth at Vanguard, this will be a different one only to be used in combination with the solo-401). It takes some work to fill out yet another form when you are ready to deposit after tax money in your 401 and then transfer it to the connected Roth account. The actual conversion can't be done online.

[litovskyassetmanagement]

Traveldoc wrote:

Actually, for individuals, Vanguard does have a plan you can use, it’s called a “pooled account”. Go to the site, type it in “search”, and a PDF to set up the account will show. You need an actuary to draft the plan document, specifically stating that Roth conversion of after tax dollars is allowed in the plan. The cost for the plan document is a one time fee of about $1,400-1,800. The pooled account will be a Solo-401k with a separately opened Roth account, connected to the 401 (so if you already have a Roth at Vanguard, this will be a different one only to be used in combination with the solo-401). It takes some work to fill out yet another form when you are ready to deposit after tax money in your 401 and then transfer it to the connected Roth account. The actual conversion can’t be done online.

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Not so fast. I do lots of VRIP accounts, and I'm yet to find any TPA who will allow in-plan conversions of specifically after-tax assets to be done INSIDE the plan (in-plan conversion of taxable assets seems to be OK).  This is the trick - if anyone is working with a TPA to set up a VRIP account (or any other type of pooled account for that matter that comes with a custom plan document), I'd be more than curious to find out whether they will 1) allow after-tax in-plan conversions and 2) if not, why not.  I've spoken to multiple TPAs, and they will NOT allow this in their plan documents as of yet.  Most claiming lack of IRS guidance.  TPAs are a conservative lot, so I would not expect this to be available to plans yet.

And if your TPA does allow this, I would be even more curious to find out WHY (hopefully, written down with their attorney's opinion).  There may be some TPAs who are not particularly scrupulous, so that's also a warning sign.  If 99% of TPAs don't do something, and a handful does, I'd also be concerned.

[wbwh]

Thanks everyone for your ideas.

Kon - I am a little bit confused by your last post.  Are you skeptical of the legality of the whole Mega backdoor roth IRA idea?  From my reading, my understand is that the whole idea behind it is that you do convert your after-tax (non Roth) 401k money into Roth money.

[litovskyassetmanagement]

wbwh wrote:

Thanks everyone for your ideas.

Kon – I am a little bit confused by your last post.  Are you skeptical of the legality of the whole Mega backdoor roth IRA idea?  From my reading, my understand is that the whole idea behind it is that you do convert your after-tax (non Roth) 401k money into Roth money.

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No, I'm not, it is definitely legal. The only concern I have is that moving money to Roth every year and doing after-tax to the max in a solo 401k might potentially be an issue.  This is why I would prefer to wait until we either get a full green light on this specific approach and/or we get a green light on in-plan after-tax Roth conversions (which I would prefer anyway to moving money to Roth every year for multiple reasons).  This might take some time, and I'm confident both of these strategies will most likely be OK, but without that certainly I don't want to advise doing this just yet, primarily because if the strategy is (for some reason) disallowed, it might take some work (and money) to undo it if any IRS regs become retroactive.

So for example, by all means, stuff a solo 401k full of after-tax money.  I just wouldn't go converting this to Roth every year.  For one thing, I would wait until you can amend your document to allow in-plan after-tax conversions to Roth. And maybe you can convert after a while, say after 5 years or so, not every year.  For all I know the IRS may say everything is fine, but go after people who convert to Roth every year. I have no clue, and neither does anyone else at this point what will happen.  Their examples clearly showed that they expect the after-tax money to age somewhat.

 

[spiritrider]

Kon Litovsky wrote:

http://www.irafinancialgroup.com/solo401kassetprotection.php

SEP and SIMPLE are IRAs, and they follow a different set of rules than a 401k.  These do not have federal protection. A 401k is a qualified retirement plan (just like SEP and SIMPLE), but an individual 401k does indeed afford asset protection and creditor protection under federal law (unlike SEP or SIMPLE).

 

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You should have read your link a little closer you would have seen the following:

Solo 401(k) Plans

A debtor’s plan benefits under a pension, profit-sharing, or section 401(k) plan are generally safe from creditor claims both inside and outside of bankruptcy due to ERISA and the Code’s broad anti-alienation protections. However, case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans. Thus, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.

 

[litovskyassetmanagement]

spiritrider wrote:

Kon Litovsky wrote:

http://www.irafinancialgroup.com/solo401kassetprotection.php

SEP and SIMPLE are IRAs, and they follow a different set of rules than a 401k.  These do not have federal protection. A 401k is a qualified retirement plan (just like SEP and SIMPLE), but an individual 401k does indeed afford asset protection and creditor protection under federal law (unlike SEP or SIMPLE).

 

Click to expand…

You should have read your link a little closer you would have seen the following:

Solo 401(k) Plans

A debtor’s plan benefits under a pension, profit-sharing, or section 401(k) plan are generally safe from creditor claims both inside and outside of bankruptcy due to ERISA and the Code’s broad anti-alienation protections. However, case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans. Thus, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.

 

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You are right about the State law vs. Federal law, but a quick glance at the State law shows that for the most part, the same protection is there under the State law. Only 2 states don't allow it fully, and several have rules about the timing.

Edit: And some states limit the amount to something less than an IRA, so in some states the money is not protected fully, which is definitely something to consider.