Mega Backdoor roth via my own business Vanguard 401k

[kgtest]

I just opened a 401k and a Roth 401k through Vanguard for my own business. The objective is to maximize my Roth Contributions.

I plan to contribute $20,500 to the 401k in 2022.
I plan to contribute the remaining $40,500 of allowable contributions to my Roth 401.

Then I plan to do a backdoor roth contribution of the $20,500 + YTD gains at the end of 2022.

I am presuming since I am in the 24% tax bracket that I will then have to pay 61,000(.24) = $14,640 in taxes.

Challenge me on this decision, am I missing anything, being a fool, or is this a good plan, assuming my future tax rate will be much higher?

Or should I stay away from the backdoor conversion and just contribute to the 401k and Roth 401k??

 

[kgtest]

Vanguard states limits for both employee and employer is $61,000 in 2022 and I am below the highly compensated phase-out $135,000 income limits.

https://retirementplans.vanguard.com/VGApp/pe/edudurable/ContributionLimits#!/#/

 

[kgtest]

Another key takeaway or "rule" that I read, that I am still trying to understand is:

You cannot have tax-deferred money in a traditional IRA, SEP IRA, or SIMPLE IRA in your name.

If you do hold tax-deferred IRA dollars on 12/31 of the calendar year in which you made the Roth conversion, you’ll be subject to taxes when making your conversion per the pro-rata rule.

So it looks like I need to do an in-kind transfer of my SEP IRA, and traditional IRA over to the Vanguard 401k before I can do this or face the consequence of this so called Pro Rata rule.

 

[WithAPurpose]

Hi kgtest,

I have had a Solo 401k for a few months now. I've been moving money in from old job's 401k and doing In-Plan Roth Conversions. Mine is at E-Trade since they were the only ones allowing those in-plan conversion at the time. so... slightly different situation.

About the contribution limits... Your Employee contributions are limited to $20,500, which you can make as traditional or Roth (assuming your compensation is at least that much). The other $40,500 is Employer contributions and they are limited to 25% of your employee pay up to the max total of $40,500 as you calculated, those all have to go into the Traditional account. That means you need to be making $162,000 as an employee of the business. I found these details on the IRS website with a quick search for solo 401k.

So If you're making at least $162,000 on a Sched C business, then you can put the max into a 401k and convert the employer portion from traditional to Roth whenever you want, paying the amount of taxes you calculated (roughly)

I think what you're actually contemplating is an in-plan Roth conversion. So you're right that however you get the money into the traditional 401k, it will have to be taxed as it get converted over to the Roth.

I also see a lot of verbiage in my plan about the incoming transfers coming from a Qualified Plan. I would look to make sure that SEP and Traditional IRAs can be rolled into the plan. I'm not sure traditional IRAs will be able to be rolled in to a 401k.

A simple option may be just to convert the IRAs to Roth IRA's but I understand the desire to keep everything in a 401k.

WithAPurpose

 

[kgtest]

Hi kgtest,

I have had a Solo 401k for a few months now. I've been moving money in from old job's 401k and doing In-Plan Roth Conversions. Mine is at E-Trade since they were the only ones allowing those in-plan conversion at the time. so... slightly different situation.

About the contribution limits... Your Employee contributions are limited to $20,500, which you can make as traditional or Roth (assuming your compensation is at least that much). The other $40,500 is Employer contributions and they are limited to 25% of your employee pay up to the max total of $40,500 as you calculated, those all have to go into the Traditional account. That means you need to be making $162,000 as an employee of the business. I found these details on the IRS website with a quick search for solo 401k.

So If you're making at least $162,000 on a Sched C business, then you can put the max into a 401k and convert the employer portion from traditional to Roth whenever you want, paying the amount of taxes you calculated (roughly)

I think what you're actually contemplating is an in-plan Roth conversion. So you're right that however you get the money into the traditional 401k, it will have to be taxed as it get converted over to the Roth.

I also see a lot of verbiage in my plan about the incoming transfers coming from a Qualified Plan. I would look to make sure that SEP and Traditional IRAs can be rolled into the plan. I'm not sure traditional IRAs will be able to be rolled in to a 401k.

A simple option may be just to convert the IRAs to Roth IRA's but I understand the desire to keep everything in a 401k.

WithAPurpose

Interesting. So Vanguard doesn't allow the in-plan conversion? I actually don't have any old 401ks, I just have a Rollover IRA with Vanguard.

I will earn enough with the business to make the max contribution at 25% It took me a minute to figure this out, at first I was just going to pay myself the top of the Social Security Cap of 142,800, and offset the remainder of my "pay/income" with losses...but I might actually go to that 25% mark to get the most out of the Roth Contributions.

I don't have much of a desire to keep my rollover in the 401k, but the problem is my Rollover IRA balance with Vanguard is around $400,000 so I would take a MASSIVE tax hit this year roth converting all of that at once. 400k Conversion + 160k Schedule C + my wife's income would put us in a pretty high income tax bracket.

I THINK there might be another option here. Contribute the max to the 401k, backdoor convert that plus the gains to the Roth IRA, and I believe I can make AFTER tax contributions to the Roth 401k on the remaining $40,500 to get it all into the Roth at the end of the day.

I could be wrong on all of this, need to double check the plan summary documents I received today when I opened the Vanguard Solo 401k and Solo Roth 401k, call Vanguard and ensure this is all possible.