Solo 401k voluntary after-tax contributions are a special way to get some extra cash into your self-directed retirement plan. But beware as not all Solo 401k providers offer voluntary after-tax contributions in the plan. Choose wisely to make sure your Solo 401k is as flexible as possible.
The Solo 401k voluntary after-tax contribution is a type of employee salary deferral contribution. However, unlike the pre-tax or Roth employee contribution, the amount you can contribute can be much higher.
Different from Roth Contributions
While all Roth contributions are after-tax, not all after-tax contributions are Roth.
Solo 401k voluntary after-tax contributions do not start out as Roth funds. However, if your plan allows, you can convert the voluntary after-tax contributions to Roth funds with an in-plan Roth conversion. The Solo 401k by Nabers Group allows for both voluntary after tax contributions, and in-plan Roth conversions.
These pieces are necessary to implement a strategy called the Mega Backdoor Roth Solo 401k. The mega backdoor Roth strategy allows you to compliantly get far more than the typically allowed limit of Roth funds into the plan via contributions.
Normally, you are limited to Roth contributions of $23,500 per year (or $31,000 if you are age 50 or older). However, Solo 401k voluntary after tax contributions allow you to put up to $69,000 per year (or $76,500 per year if you are age 50 or older) into your retirement plan!
Contribution Limits
Solo 401k voluntary after-tax contributions are a type of employee salary deferral contribution. They are not profit sharing employer contributions. Because they are after-tax contributions, they are not tax-deductible.
The Solo 401k by Nabers Group allows you to contribute up to 100% of your net compensation as a voluntary after-tax contribution. This means you can contribute up to $69,000 per year as a voluntary after-tax contribution. If you are age 50 or older, you can contribute $76,500 after tax. If you are married, you and your spouse can each reach that maximum contribution. Remember, all Solo 401k contributions are based on your net earnings from your business, so you can only contribute as much as you earned.
Logistics
Document your Solo 401k voluntary after tax contribution using the Solo 401k contribution form. Nothing needs to be formally filed or reported to the IRS for your voluntary after-tax contribution.
Remember, as your own Solo 401k plan administrator, trustee and record keeper, it is your responsibility to ensure you’re keeping good records of your plan. This means you need to document all the money coming in, via rollovers and/or contributions. You also need to document the money going out, from loans, investments, distributions or in-plan Roth conversions.
Open a bank account for each type of funds in your Solo 401k. This might mean you have three bank accounts: 1) pre-tax funds, 2) Roth funds, 3) after-tax funds. Having distinct bank accounts for each tax classification will make your record keeping much simpler.
Convert After-Tax Funds to Roth
Once you’ve made your Solo 401k voluntary after-tax contribution, you can convert those funds to Roth. Nabers Group will provide you an in-plan Roth conversion form as a part of your Solo 401k document package. Complete this form and store it in your records to document the conversion in writing.
You’ll also have your CPA complete form 1099-R to document the funds moving from the after-tax to the Roth portion of the Solo 401k plan. After your paperwork is complete, you can move the funds from your Solo 401k after-tax bank account to your Solo 401k Roth funds bank account.
Solo 401k voluntary after-tax contributions are different from Roth 401k funds in that they may be distributed at any time. This is also what allows you to do the in-plan Roth conversion to make the after-tax funds classified as Roth.
Tax-Free Distributions
If your Roth funds are “qualified”, you can distribute them from the Solo 410k plan tax-free. In order for Roth funds to become qualified, the following two items must be met:
- Roth funds have been in your Roth 401k account for five years
- You are age 59.5 or older
Voluntary after-tax contributions are an excellent way to get more money into your Solo 401k plan. Once the funds are in the plan and converted to Roth, the qualified tax-free distributions can also give you an edge in your wealth growth and accumulation strategy over time.
