Announcement

Collapse
No announcement yet.

Recommended brokerage to set up solo 401(k) for mega backdoor ROTH?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Recommended brokerage to set up solo 401(k) for mega backdoor ROTH?

    I recently switched my contract from employee to independent contractor.

    As such, I am now 1099.

    If I understand correctly, I now have the ability to contribute the maximum limits via a solo 401(k) and convert all of this into a ROTH IRA via mega back door ROTH.
    First, this is true, and I should do it, correct?

    I already have an Roth IRA with Fidelity I have been using for backdoor ROTH for the past 3 years. Fidelity does not allow in plan conversions for their solo 401k, so I will have to look elsewhere, then I suppose roll it over eventually into my Fidelity ROTH IRA.

    Can anybody recommend the best brokerage for what I am trying to do?

    Thanks!

  • #2
    ETrade is the mainstream individual 401k provider that allows inplan Roth rollovers. None of the mainstream providers allow the MBDR. If you want to go this route you’ll need a custom 401k plan.

    Comment


    • #3
      Originally posted by GasFIRE View Post
      ETrade is the mainstream individual 401k provider that allows inplan Roth rollovers. None of the mainstream providers allow the MBDR. If you want to go this route you’ll need a custom 401k plan.

      You've lost me.

      To do a MBDR, you simply maximally fund a solo 401(k) with the employee and employer pre-tax portions then the employee after tax portion to the IRS limit, then do an in-plan ROTH conversion then roll it over into a ROTH IRA, correct?

      You said E-trade allows in-plan Roth rollovers. So why doesn't it allow MBDR? Couldn't I set up a solo 401k with E-trade, immediately max it out to IRS limits, convert it all to Roth, then roll it over to an IRA (which I would assume would also have to be with E-trade, but if I could move to my existing fidelity IRA, that would be nice)

      I am sure I am missing something though and you are right though.
      What is the most common way for people who have solo 401(k)s and do the MBDR through them to do it?

      Comment


      • #4
        Google seems to indicate there is a cottage industry of solo 401(k) companies.

        Get a Solo 401(k) from Ubiquity Retirement + Savings | Ubiquity (myubiquity.com)

        I was hoping this could be something I could do without hiring a middleman. Looks like not? If I have to go through a middleman like the above, is there a recommendation?

        Comment


        • #5
          Originally posted by Nash22 View Post


          You've lost me.

          To do a MBDR, you simply maximally fund a solo 401(k) with the employee and employer pre-tax portions then the employee after tax portion to the IRS limit, then do an in-plan ROTH conversion then roll it over into a ROTH IRA, correct?

          You said E-trade allows in-plan Roth rollovers. So why doesn't it allow MBDR? Couldn't I set up a solo 401k with E-trade, immediately max it out to IRS limits, convert it all to Roth, then roll it over to an IRA (which I would assume would also have to be with E-trade, but if I could move to my existing fidelity IRA, that would be nice)

          I am sure I am missing something though and you are right though.
          What is the most common way for people who have solo 401(k)s and do the MBDR through them to do it?
          An in-plan Roth rollover and a Mega Backdoor Roth are completely different. Typical individual 401k plans are pre-tax only regardless of whether the contributions are employEE or employER (employEE contributions may be Roth if supported). A MBDR requires an after-tax account for the after-tax contributions that are subsequently rolled over into either the Roth portion of the 401k plan or your Roth IRA. No mainstream individual 401k that I’m aware of provides access to an after-tax account.

          A good overview on the MBDR is here:
          https://www.whitecoatinvestor.com/th...door-roth-ira/

          There are multiple threads on this forum regarding companies that provide custom documents for these plans. Whether using one of these discount providers or using a TPA (third party administrator) that will handle the record keeping and necessary document filing depends on how comfortable and adept you are with the DIY approach.
          Last edited by GasFIRE; 04-24-2022, 05:22 PM.

          Comment


          • #6
            GasFIRE has laid it out very well

            bottom line, you cannot get MBDR for free

            Comment


            • #7
              This is extraordinarily confusing.

              It appears Etrade does allow after tax contributions. Is it just not considered a "mainstream" individual 401k? I'm confused by the terminology.

              A small amount of research suggests that it is possible to open multiple accounts at Etrade and do the roll over.

              Why does E-trade and others offer a solo 401(k) if clients are required to be the plan administrator? I would guess near 0% of clients know how to administer a 401(k) plan properly. I certainly don't. I really don't even know what a plan administrator is or does.

              Further research also indicates that the solo 401(k) companies are not actually plan administrators either.

              Hours of research online tonight have both failed to either
              (1) provide a step-by-step guide as to how to roll your own solo 401(k) and do a MBDR at E-trade, which people claim is possible
              (2) find a true third party consultant I can just pay and do everything for me. I set up a call with Ubiquity, but from what I can tell using these companies still put a lot of legwork and responsibility on me to make sure things are done correctly. If that's the case, I'm not sure why I am not just doing option (1) and avoiding fees altogether.

              Comment


              • #8
                Originally posted by Nash22 View Post
                This is extraordinarily confusing.

                It appears Etrade does allow after tax contributions. Is it just not considered a "mainstream" individual 401k? I'm confused by the terminology.

                A small amount of research suggests that it is possible to open multiple accounts at Etrade and do the roll over.

                Why does E-trade and others offer a solo 401(k) if clients are required to be the plan administrator? I would guess near 0% of clients know how to administer a 401(k) plan properly. I certainly don't. I really don't even know what a plan administrator is or does.

                Further research also indicates that the solo 401(k) companies are not actually plan administrators either.

                Hours of research online tonight have both failed to either
                (1) provide a step-by-step guide as to how to roll your own solo 401(k) and do a MBDR at E-trade, which people claim is possible
                (2) find a true third party consultant I can just pay and do everything for me. I set up a call with Ubiquity, but from what I can tell using these companies still put a lot of legwork and responsibility on me to make sure things are done correctly. If that's the case, I'm not sure why I am not just doing option (1) and avoiding fees altogether.
                if your research led you to believe that E*Trade’s one participant 401k plan allows after tax contributions then you read bad sources

                Employee Fiduciary can provide the plan and services you need

                Comment


                • #9
                  Originally posted by jacoavlu View Post

                  if your research led you to believe that E*Trade’s one participant 401k plan allows after tax contributions then you read bad sources

                  Employee Fiduciary can provide the plan and services you need
                  This thread on bogleheads claims it can be done...

                  After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k - Page 2 - Bogleheads.org

                  I will just call E-trade and ask them.

                  Comment


                  • #10
                    spiritrider One very knowledgeable person , typically advises that very few have the knowledge to handle stuff that they don’t really know. By the way, ETrade and their rep will have zero responsibility. You are getting a custom plan 401k plan and probably need an employee fiduciary. Consider the next responsibility, how are you going to know what a plan amendment is required? Just saying, get some help. This is not a different version of an IRA.

                    Comment


                    • #11
                      I haven't read that bogleheads thread but I went straight to the Etrade plan document

                      https://content.etrade.com/etrade/es...ionBooklet.pdf

                      and it appears Etrade may have changed their plan document. In the past their plan allowed in plan Roth rollover which was a unique feature among mainstream brokerage solo 401ks and if of course a necessary component of MBDR but their plan did not allow employee after tax contributions

                      but now it seems their plan does allow employee after tax contributions, referred to as Nondeductible Employee Contributions in the plan document

                      curious on spiritrider input on this - setting aside the point made above that just because something is possible doesn't mean that one should do it - if you don't know what you're doing then paying Employee Fiduciary to provide a plan and function as a proper TPA will be money well spent



                      Comment


                      • #12
                        Originally posted by Nash22 View Post
                        This thread on bogleheads claims it can be done...

                        After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k - Page 2 - Bogleheads.org

                        I will just call E-trade and ask them.
                        Looks like we have been asleep at the switch or in my case. My self-exiling from Bogleheads a few years ago has had its consequences.

                        The MBDR missing piece from E-Trade has been the lack of an employee after-tax contribution election on their adoption agreement. I don't know when it happened, but they have now added a Section 3C which defaults to Yes

                        Part C. Nondeductible Employee Contributions

                        May a Contributing Participant make Nondeductible Employee Contributions pursuant to Plan Section 3.05 (select one)?
                        1. Option: Yes
                        2. Option: No
                        NOTE: If no option is selected, Option 1 will apply. Nondeductible Employee Contributions made under this Part C will be subject to ACP Testing.

                        I have not read E-Trade's Individual 401k document. So I can not yet comment on if you can immediately in-service do Roth rollovers after contribution.

                        However, at a minimum it appears you can make employee after-tax contributions and immediately do an in-plan Roth rollover (IRR). My last look at E-Trade' o401k plan document, required a two-year elapsed time period before in-service rollovers during the first five years of the plan.

                        Even if that still exists, it is not big deal. You immediately stop the earnings from being taxable and can roll them out pretty soon.

                        Comment


                        • #13
                          Originally posted by Nash22 View Post
                          Why does E-trade and others offer a solo 401(k) if clients are required to be the plan administrator? I would guess near 0% of clients know how to administer a 401(k) plan properly. I certainly don't. I really don't even know what a plan administrator is or does.
                          I would follow jacoavlu ‘s recommendation and look into Employee Fiduciary at least until you have a better understanding of the MBDR process requirements. While I was not aware that ETrade amended their plan documents as I don’t have any accounts there, it doesn’t appear that they are actively promoting the MBDR but just allowing access to the process. From the Bogleheads thread it appears that CSR knowledge is hit or miss depending on who you get (not unexpected for a seldom used feature) so you have to know what you’re doing since there is no “go to” person for you to access at ETrade. My other concern is ETrade is now owned by Morgan Stanley. Are they going to continue to offer low volume features or try to consolidate with MS? Sounds theoretical but TDA was purchased by Schwab and will soon discontinue Roth 401k access for individual plans.

                          Comment


                          • #14
                            My caution against rolling your own MBDR from the online glorified document resellers. Was based on how little they are doing for you and the fact you responsible for almost all 401k plan compliance.

                            With this offering, E-Trade is providing a one-shop shop for:
                            • One-participant 401k plan document and adoption agreement.
                            • Monitoring, alerting and providing any necessary amendments/restatements.
                            • Custodial services (management of the accounts).
                            • Record keeping services (Contributions, earnings, distributions).
                            • IRS reporting.
                            • Etc...

                            LIke any other mainstream one-participant 401k, you will still be responsible for:
                            • 401k compliance rules and regulations such as Controlled and Affiliated Groups, etc...
                            • Contribution timing and limits* including 403b annual addition limits.
                            • Form 5500-EZ filing when necessary. Likely a lot quicker with MBDR.
                            • etc..
                            If E-Trade's implementation of the MBDR is competent. While I am less concerned with someone using E-Trade without a TPA. Anyone using an individual MBDR, needs to research, study and learn.

                            *There is always a concern with individuals calculating MBDR contribution limits. To my knowledge there is no retail tax software, online calculators or IRS guidance/publications available to properly calculate MBDR contributions in all circumstances.

                            The MBDR calculations are problematic with both employer and employee after-tax contributions when self-employed earned income is < (annual addition limit / 0.8). To my knowledge, the best source for calculating MBDR contributions is The Finance Buff's spreadsheet.

                            Comment


                            • #15
                              I did it by myself for free with Vanguard.

                              Comment

                              Working...
                              X