Mega Backdoor Roth

[CincyDoc]

We currently max
401k + employer match for me
HSA
Backdoor Roth for my wife and myself
403b for my wife - no employer match. Her employer doesn't allow for after tax contributions or in-service withdrawals, so we can't use it for a mega roth

I would like to start a solo 401k for my wife and do a mega backdoor roth.
We could create a management company for our rentals and pay her a W2, would prefer to keep this amount to a minimum, ideally <$5k.
She can contribute an extra $38,500 in after tax contributions to the solo 401k to max it out, however her pre-tax income is <$40k

I know she will have to have some income on the W2 from a separate business for the Solo401k, but does it need to be the full $38.5k or can we use my income to fund the after tax contributions to the solo 401k?

I don't think SEP or SIMPLE IRAs make since, since they would require so much income to max and would both mess with the backdoor roth.

[spiritrider]

Not that it matters, but she would not be subject to a $38.5K limit. Each unaffiliated employer has a separate annual addition limit (2022 = $61K).

However, the annual addition limit is the lessor of your compensation from that employer and the statutory limit. If her W-2 Box 1 wages were $5K, her maximum employee after-tax contributions would be $5K. Only her compensation from that employer matters. Her other W-2 wages and especially yours are totally irrelevant.

You can't just create a ficticious management company in order to sponsor a one-participant 401k plan just to pass-thru contributions. The management company must meet the requirements to be considered engaged in a trade or business.

The IRS reiterated in the final Section 199A (QBI) regulations, SCOTUS Higgins v. Commissioner is the seminal ruling used to determine if you are engaged in a trade or business. This ruling requires the taxpayer to enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from a considerable, regular, and continuous activity.

Your entire premise demonstrates a bad faith intention. Not to mention you haven't indicated that the workload of your rentals justifies a management company. Even if it did. Your wife can only be paid fair market value (FMV) wages for business necessary tasks. You can't arbitrarily make up wages based on the contributions desired.

[Larry Ragman]

We currently max
401k + employer match for me
HSA
Backdoor Roth for my wife and myself
403b for my wife - no employer match. Her employer doesn't allow for after tax contributions or in-service withdrawals, so we can't use it for a mega roth

I would like to start a solo 401k for my wife and do a mega backdoor roth.
We could create a management company for our rentals and pay her a W2, would prefer to keep this amount to a minimum, ideally <$5k.
She can contribute an extra $38,500 in after tax contributions to the solo 401k to max it out, however her pre-tax income is <$40k

I know she will have to have some income on the W2 from a separate business for the Solo401k, but does it need to be the full $38.5k or can we use my income to fund the after tax contributions to the solo 401k?

I don't think SEP or SIMPLE IRAs make since, since they would require so much income to max and would both mess with the backdoor roth.

While spiritrider makes clear your plan for MBD Roth won’t work, don’t forget that it is a perfectly good plan to use a taxable account. 1) Invest as much as you want annually; 2) deferred taxable gain, then LTCG rates if you withdraw; 3) yes, must pay taxes on dividends, but these are at qualified dividend rates; 4) unlimited investment options (but use a low cost total market index fund anyway); 5) eventually a stepped up basis at death, so good for estate planning.

[CincyDoc]

Not that it matters, but she would not be subject to a $38.5K limit. Each unaffiliated employer has a separate annual addition limit (2022 = $61K).

Im certainly not a tax expert, but that is the opposite of what I have read many other places

However, the annual addition limit is the lessor of your compensation from that employer and the statutory limit. If her W-2 Box 1 wages were $5K, her maximum employee after-tax contributions would be $5K. Only her compensation from that employer matters. Her other W-2 wages and especially yours are totally irrelevant.

That is what I figures, but hoped that after tax contributions were different, in the way that a couple MFJ can fund 2 IRAs, even if only 1 spouse has income.

You can't just create a ficticious management company in order to sponsor a one-participant 401k plan just to pass-thru contributions. The management company must meet the requirements to be considered engaged in a trade or business.

The IRS reiterated in the final Section 199A (QBI) regulations, SCOTUS Higgins v. Commissioner is the seminal ruling used to determine if you are engaged in a trade or business. This ruling requires the taxpayer to enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from a considerable, regular, and continuous activity.

Your entire premise demonstrates a bad faith intention. Not to mention you haven't indicated that the workload of your rentals justifies a management company. Even if it did. Your wife can only be paid fair market value (FMV) wages for business necessary tasks. You can't arbitrarily make up wages based on the contributions desired.

Of course you can't, but we run a very real real-estate business and do a significant amount of work for it. Currently all of the income is tax deferred do to depreciation write off, so changing it to w2 or 1099 income doesn't make much sense

[WorkforFIRE]

Agree with the above. You can’t do MBDR.
And spirit rider is basically a tax expert. Has carried many of us through some complex tax issues. And your situation isn’t complex, tbh.
I would aggressively invest into taxables.

Good luck

[spiritrider]

I'm certainly not a tax expert, but that is the opposite of what I have read many other places

I don't know where or what you read, but either they were wrong or you misinterpreted. Refer to this link on this site.

https://www.whitecoatinvestor.com/multiple-401k-rules/

Not to mention the tax code and IRS regulations, guidance and website resources.

That is what I figures, but hoped that after tax contributions were different, in the way that a couple MFJ can fund 2 IRAs, even if only 1 spouse has income.

Spousal contributions are only allowed with IRA accounts.

Of course you can't, but we run a very real real-estate business and do a significant amount of work for it. Currently all of the income is tax deferred do to depreciation write off, so changing it to w2 or 1099 income doesn't make much sense.

As I stated, contributions are limited to compensation. Any compensation would be subject to FICA or SE taxes, federal and any state/local income taxes.

[Hank]

Im certainly not a tax expert, but that is the opposite of what I have read many other places





That is what I figures, but hoped that after tax contributions were different, in the way that a couple MFJ can fund 2 IRAs, even if only 1 spouse has income.



Of course you can't, but we run a very real real-estate business and do a significant amount of work for it. Currently all of the income is tax deferred do to depreciation write off, so changing it to w2 or 1099 income doesn't make much sense

Original poster, I'm not trying to pile on, but please make sure that the sources you read actually cite and comply with the Internal Revenue Code (IRC) and case law. There are lots of dumb things on the internet. Violating the law leads to hefty fines or men with guns taking your stuff or you away.