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Help with opening Solo 401k and Megabackdoor Roth

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  • Help with opening Solo 401k and Megabackdoor Roth

    Hi everyone,

    Long time browser and user for WCI, definitely has become a hobby of mine in the past couple years.

    I am an anesthesiologist who has been out practicing for a couple of years.

    I have recently taken a job at a large academic institution (W2) and I am starting to practice Saturdays as a 1099.

    My W2 Income is 350k and my 1099 income will look to be 5k for 2021 (Just started) and projected to be 50-70k in 2022.

    My wife and I currently:

    No debts
    Maxing our HSA Family, 403bs, 457b, back door roths, 529
    My employer will start a 5% salary match next September if that makes a difference
    Excess going to brokerage account


    I really want to lower my taxable income from my side hustle. It seems like a solo 401k seems like the best option as a sole proprietor and income level. I will likely form it into an LLC in the future. My understanding is for 2021, I can contribute employer contributions to the solo 401k for 20% of gross profit which in this case would be $1000. I do have about 2.5k in expenditures from the start up I plan to deduct which is licensing and malpractice insurance.

    For 2022, what would be the most financially productive way to allocate money between the 403b and a solo401k to take advantage of the 5% employer match. I figure I would max my employer 403b as they will provide a match starting September 2022 and make as much of an employer contribution to my solo401k as possible and just make sure the solo401k and 403b employer contributions do not exceed 36.5k aggregate?

    I've also been researching mega back door roths, seems like Fidelity is the way to go for simplicity? But, it also seems too simple to be able to open one tomorrow and deposit 36.5k as an after tax employer non-roth contribution as I have already maxed my 403b for the year with no other employer contributions for 2022. Is this correct? I feel like i'm missing something

    A lot of questions but very thankful for any help!

  • #2
    Originally posted by NoobieInvestor View Post
    I've also been researching mega back door roths, seems like Fidelity is the way to go for simplicity? But, it also seems too simple to be able to open one tomorrow and deposit 36.5k as an after tax employer non-roth contribution as I have already maxed my 403b for the year with no other employer contributions for 2022. Is this correct? I feel like i'm missing something
    The MBDR may be outlawed starting in 2022 depending on what if any of Biden’s BBB legislation gets approved (House has passed a version, the Senate has not). If still available in 2022 neither Fidelity nor any of the other mainstream individual 401k providers support the MBDR. You’ll need a custom plan that allows after-tax, non-Roth contributions and this isn’t permitted by any of the mainstream provider plans. I would wait until 2022 to see what if anything is legislated upon us.

    Comment


    • #3
      Originally posted by GasFIRE View Post

      The MBDR may be outlawed starting in 2022 depending on what if any of Biden’s BBB legislation gets approved (House has passed a version, the Senate has not). If still available in 2022 neither Fidelity nor any of the other mainstream individual 401k providers support the MBDR. You’ll need a custom plan that allows after-tax, non-Roth contributions and this isn’t permitted by any of the mainstream provider plans. I would wait until 2022 to see what if anything is legislated upon us.
      I guess my impression was fidelity and mysolo401k are both supporting the MBDR. Is there somewhere that says they are stopping this? I do understand that a current bill may go into effect, but even if it does go extinct in 2022, it would be nice if there was something I could set up before the year 's end. Seem like getting ~35k in a roth account would be advantageous vs contributing to a taxable account.

      Comment


      • #4
        Originally posted by NoobieInvestor View Post
        I guess my impression was fidelity and mysolo401k are both supporting the MBDR. Is there somewhere that says they are stopping this? I do understand that a current bill may go into effect, but even if it does go extinct in 2022, it would be nice if there was something I could set up before the year 's end. Seem like getting ~35k in a roth account would be advantageous vs contributing to a taxable account.
        You misunderstand the context of MySolo401k and Fidelity in regards to a one-participant 401k plan supporting the MBDR. A one-participant 401k plan requires a plan document/adoption agreement, custodian, record keeping, IRS/participant reporting, trust/trustee*, and IRS compliance.

        Fidelity offers a mainstream full-service Self-Employed (one-participant) 401k plan. This plan does NOT support the employee after-tax contributions, in-plan Roth rollovers (IRRs) and/or in-service Roth rollovers necessary to support the MBDR. They provide the 401k plan document, adoption agreement, act as the (custodian, record keeper, trust/trustee), file IRS/participant reporting and most 401k compliance except for identifying/managing Controlled/Affiliated Service groups, contribution timing/limits, Form 5500-EZ and other tax matters. However, only pre-tax traditional employee deferrals employer contributions are supported.

        MySolo401k not a full-service one-participant 401k plan provider. They provide the one-participant 401k plan document/adoption agreement. You must find your own custodian which may very well be Fidelity Investment Only accounts (that may be why you think Fidelity supports a MBDR) and perform your own record keeping. *They require you to create a trust and act as or provide your own trustee even though as a non-ERISA 401k plan it is not required. They do provide Form 1099-Rs and Form 5500-EZ and limited compliance support.

        The fact that you do not understand these distinctions leads me to believe you are not a good candidate to almost fully self-administer a one-participant MBDR 401k plan from MySolo401k and other primarily 401k plan document resellers. You do not know what you do not know.

        Comment


        • #5
          Thank you for the information - yes, I do agree. It seems there has to be more complexity than open 401k, MBDR, and profit. I still do plan on opening a Solo401k, likely fidelity or etrade at at this point. My understanding is that as a sole proprietor, I can contribute 20% of net income for 2021? Which may be around $5-600, but would be better than nothing!

          Comment


          • #6
            Originally posted by NoobieInvestor View Post
            Thank you for the information - yes, I do agree. It seems there has to be more complexity than open 401k, MBDR, and profit. I still do plan on opening a Solo401k, likely fidelity or etrade at at this point. My understanding is that as a sole proprietor, I can contribute 20% of net income for 2021? Which may be around $5-600, but would be better than nothing!
            You can contribute 20% of (net profit - (50% of FICA taxes on said net profit)). Recommend you wait until after BOY to calculate and contribute this amount.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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