No announcement yet.

SEP-IRA into Solo 401k, Backdoor Roth?

  • Filter
  • Time
  • Show
Clear All
new posts

  • SEP-IRA into Solo 401k, Backdoor Roth?

    Would appreciate feedback on my plan, I have a SEP-IRA from my S corporation at Schwab, from last year, uninvested (made in 2021 for 2020 tax year based on 2020 wages and reported on 2020 taxes - thanks spiritrider for clarifying this point in a post). I do not have any other pretax or traditional IRAs, but have been doing backdoor Roths for years. I just found out that the SEP-IRA will affect a backdoor done this year.

    So my plan is:
    1. Rollover the SEP-IRA into a new solo 401k (I don't think it affects any solo 401k contribution limits for 2021?)
    2. Make a pretax $15,000 contribution to the solo 401k from W2 wages from this year (I put $4500 into a Roth 403b where I am an employee at a hospital).
    3. Make a $3750 profit sharing contribution to solo 401k (25% of 15,000?)
    4. Make a post-tax contribution to solo 401k (am trying to figure out how this works and made another post on it)
    5. Do a backdoor Roth for $6000 before year end.

    Does this all sound reasonable/correct?

    I would be interested at some point at being able to rollover the solo 401k into a traditional IRA/roth IRA (or traditional IRA and then to a Roth IRA?) if it is possible.

    What are my options for where I should open a solo 401k, that would allow me to do the above? What are reasonable fees to open one, and would I want ongoing yearly advising on it for a fee? Or is the only thing to keep track of once the account becomes > $250,000 for filing of a particular form?

    Also was it incorrect that I did a backdoor Roth in 2020 (was opened and converted in calendar year 2020 for that tax year) because of the SEP-IRA that was done in 2021, and how do I fix it? I don't think my tax preparer knew about the interaction and so did not advise anything. I did not pay any taxes on the backdoor and treated it like I did for prior years when I had no pretax IRAs.
    Last edited by improvement45; 12-14-2021, 02:32 PM.

  • #2
    Welcome to the forum! I am going to focus on #1 - #5. I or someone else can get to your other q&a’s after you absorb this info:
    1. No, the SEP r/o to a solo-k d/n impact solo-k contribution limits.
    2. Yes, you can make a $15k employee deferral through your s-corp as long as you have wages of at least $15k in 2021.
      • Or, you can make that $15k contribution to a Roth 401k account as long as you choose to make your solo-k Roth eligible when you open the account (option not available at Fido).
    3. Wrong. The PS contribution limitation is calculated as 25% of wages, not 25% of the employee deferral.
      • As you alluded to in #2, the max you can contribute as employee + employer to your solo-k for 2021 is reduced by the $4,500 you contributed to your 403b (leaving a contribution to solo-k allowable of $53,500)
    4. Are you trying to do a mega Backdoor Roth, also? Or are you referring to a Roth employee deferral?
    5. You have until 4/15 to contribute to a backdoor Roth. Then you can convert any time after the funds clear the account and are available to be moved.
      • This date assumes that Congress does not prohibit backdoor Roth conversions for high-income employees retroactive to 1/1/22, of course.
    Hope that helps and makes sense.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3

      Here are updated ones, I will leave the OP the same so the replies make sense .

      1. How do I find out how a SEP-IRA rollover (funds from tax year 2020) to a solo 401k affects contribution limits for this year? I don't find anything on web searches.
      2. Same - Make a pretax $15,000 contribution to the solo 401k from W2 wages from this year (I put $4500 into a Roth 403b where I am an employee at a hospital).
      3. Make a $7500 profit sharing contribution to solo 401k (25% of wages -30,000)
      4. I just read about a mega Backdoor Roth and it sounds like a good idea, am I allowed to put $31,000 toward this (difference from the total limit)?
      5. If I do a mega Backdoor Roth, I cannot do a backdoor Roth for $6000?

      I realize that 1. may impact the rest. But if I don't do 1 and leave the SEP-IRA as is, I can still do 2-4?


      • #4
        1. As I said in my original response, a retirement plan rollover of p.y. contributions does not impact contribution limits for 2021.
        2. Already answered
        3. Already answered.
        4. Yes, if you set up appropriate account options at a custodian that allows. We typically recommend E*TRADE (best) or TDA.
          • Given prior answers, amt you can contribute post-tax: $58,000-$4,500-$14,000-$7,500 = $32,000
          • If you plan to do this by eoy, you need to start NOW
        5. Incorrect. You can do both.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          1. Listen to jfoxcpacfp. You are not going to find a negative on the internet. Rollovers are just that. Only direct contributions based on compensation are included in contribution limits.
          2. Ditto
          3. Ditto
          4. Note: Mainstream one-participant 401k plans from low-cost brokerages only support employee deferrals (pre-tax traditional, but Fidelity and Schwab do not support post-tax Roth) and employer contributions. While they do not support the MBDR, they can provide investment-only account custodial services for a custom one-participant 401k supporting the Mega Backdoor Roth.
            1. The MBDR involves employee after-tax contributions followed by an in-plan Roth rollover (IRR) or an in-service Roth rollover. Since this all needs to be completed by 12/31 given the BBB proposed elimination of the BDR and MBDR. With the late date, your lack of knowledge and experience with 401k plans and the likelihood it would only be for one year. I highly suggest you just adopt a prototype one-participant 401k at E-Trade, Fidelity, Schwab, TD Ameritrade, or Vanguard. The contribution limits can be complicated without adding in employee after-tax contributions.
            2. Your maximum one-participant 401k employee deferral would be 100% * (your earned income (net earnings from self-employment) = business profit - 1/2 SE tax).
            3. Your calculated maximum one-participant 401k employer contribution would be 20% * your earned income. This could be further limited to the lessor of your compensation or the annual additional limit - 403b (employee + employer contributions) (net annual addition limit). Also, at lower levels of income the employer contributions could be further reduced to (earned income - i401k employee deferral) / 2.
            4. Your maximum employee after-tax contribution would be your net annual addition limit - i401k employee deferral - (employer contributions * 2
          5. Ditto
          Tell us what your ~403b (employee deferrals + employer contributions) and your ~self-employed earned income will be. Then we can tell you what your ~employer and ~potential employee after-tax contributions will be.


          • #6
            Thanks @jfoxcpacfp and spiritrider , this is very useful.

            I haven't seen d/n before, I thought it meant something else and "directly" impacted the contribution.

            Presumably I can hire someone to help with a mega backdoor roth (and anything else), but I didn't realize that the after-tax was limited by wages, which @GasFIRE pointed out, so it would not be much and does not seem to be worth it if there are ongoing fees and legislation may change it.

            I found out I can rollover a SEP-IRA into a solo 401k at Schwab, so my plan is to open the latter at Schwab, do the rollover, and steps 2, 3, and 5 above (for a backdoor Roth).

            If I want to do something with a mega backdoor roth in the future (if it's possible), can I open another 401k somewhere else in future years, even if I open this one at Schwab?

            spiritrider , I gave the numbers in 2 and 3 above (30K wages, S corporation, 4500 in Roth 403b at another job) and seemed to figure out the amounts, do you need more numbers?

            I'm thinking that the backdoor roth I did in 2020 was correct, because I had no SEP-IRA balance as of 12/31/2020, nor any as of 4/15/2021 (or May 17, 2021) when the Roth IRA deadline would have been.
            Last edited by improvement45; 12-15-2021, 11:01 AM.


            • #7
              I mixed up other threads and other forums and forgot you were an S-Corp 2% shareholder-employee. Disregard subsection 2-4 under section 4,

              With $30,000 in W-2 wages you should be able to make a $15,000 employee deferral and provided the S-Corp has the necessary gross profits to make a $7,500 employer contribution.