A self-directed 401k also known as a solo 401k for the self-employed with no full-time W-2 employees allows for three contribution types, with one of those being voluntary after-tax contributions.
The purpose of makeing voluntary after-tax contributions to a self-directed 401k plan is to maximize the owner-only employee's Roth funds. For this reason, the voluntary after-tax contribution is immediately converted to the Roth IRA or to the Roth 401k bucket (designated Roth account) of the solo 401k plan so that earnings don't accrue in the voluntary after-tax bucket. When the voluntary after-tax funds are converted, the basis (the contribution amount) is not taxable but any earnings are.
Frequently Asked Questions Surrounding the Mega Back Door Self-Directed 401k Concept
QUESTION:
I understand that after tax dollars contributed to the aftertax account would not incur additional taxes when rolled over via the MEGA backdoor roth ira, is this correct?
ANSWER:
The basis is not taxable but the earnings are. This is why it is best to convert the funds right away.
QUESTION:
Is there a deadline for the MEGA backdoor roth process during a tax year, ie the standard deadline for contributions to any other IRA?
ANSWER:
Conversions are reported in the year the funds are moved/converted from the voluntary after-tax account to the Roth account . For example, if the conversion is processed (the funds are moved to the Roth account) by 12/31/2020, the conversion is reported as occurring in the 2020 tax year.
The purpose of makeing voluntary after-tax contributions to a self-directed 401k plan is to maximize the owner-only employee's Roth funds. For this reason, the voluntary after-tax contribution is immediately converted to the Roth IRA or to the Roth 401k bucket (designated Roth account) of the solo 401k plan so that earnings don't accrue in the voluntary after-tax bucket. When the voluntary after-tax funds are converted, the basis (the contribution amount) is not taxable but any earnings are.
Frequently Asked Questions Surrounding the Mega Back Door Self-Directed 401k Concept
QUESTION:
I understand that after tax dollars contributed to the aftertax account would not incur additional taxes when rolled over via the MEGA backdoor roth ira, is this correct?
ANSWER:
The basis is not taxable but the earnings are. This is why it is best to convert the funds right away.
QUESTION:
Is there a deadline for the MEGA backdoor roth process during a tax year, ie the standard deadline for contributions to any other IRA?
ANSWER:
Conversions are reported in the year the funds are moved/converted from the voluntary after-tax account to the Roth account . For example, if the conversion is processed (the funds are moved to the Roth account) by 12/31/2020, the conversion is reported as occurring in the 2020 tax year.