This is a YouTube video titled "Solo 401(k)s & The MEGA Backdoor Roth IRA" created in August 2024. The content is a detailed financial discussion explaining Solo 401(k) plans, contribution limits, and the strategy of the mega backdoor Roth IRA. It includes technical explanations about tax-deferred, Roth, and after-tax contributions, as well as filing requirements. The excerpt features a single speaker providing educational information about retirement savings options, with a brief disclaimer from a second speaker about the nature of the advice.
We're going to talk more about Solo 401s and particularly about the mega backdoor Roth IRA. A Solo 401k is just a 401k when it's only you and your spouse, right? If you have employees that qualify for the 401, and that's going to be most employees, you can kind of exclude some minors and some part time employees. But for the most part, any employees that you have keep you from having a solo 401, sometimes called an individual 401. But if you don't, if it's just you, if you're just an independent contractor, you're paid on 1099. This is your retirement account. It's a Solo 401. It's wonderful. It's like awesome, right? You can do all kinds of things with it this year. If you're under 50, you can put in $69,000, $69,000 into your 401. And there's several different ways you can contribute that. We'll talk about that in a minute. If you are 50 plus, you get a catch up contribution, right? You can put in more money into it. I think it's $7,500 more that you can put into there. And that's how you get to the 76,500 that the ad at the top of the podcast talked about, right? That's awesome. And now you can get it all in there. Roth if you want. That might not be right for you. Tax deferred might make sense for you. It does for lots of people in their peak earnings years. But if Roth is right for you, you can get a lot of money in there as a roth contribution, any 401 that allows it. And you can set up a Solo 401 so it does whatever you want, right? Especially if you use a customized one. But if it allows it, you can do three types of contributions. You can make a traditional tax deferred employee contribution, right? This year, that's $23,000 for those under $50,000 and that's tax deferred. So it's $23,000 you don't have to pay tax on. So that probably saves you something like $10,000 in taxes off your tax bill to put that money in there. You can also make that employee contribution as a Roth contribution. So it's after tax money, you pay tax on it, you put it in there, it's never taxed again. It grows tax free, it comes out tax free and you roll it over to an ira. And I think Maybe even if you leave it in the 401. Now, since Secure Act 2.0, there's, there's no RMDs on it. And so you can leave it to your heirs and it grows tax free for them for another 10 years. It's just a really awesome deal. Okay, so those are the employee contributions. You can also make employer contributions. Okay? And this generally works out to be about 20% of your profit on your business as a sole proprietor. Right? And so if you make, you know, $200,000 while you can contribute $40,000 as a tax deferred employer contribution to your solo 401. If you're an S Corp, it basically works out to be 25% of what you pay yourself. So if your salary is $200,000, you can put in $50,000, 25% of what you paid yourself as a salary into that account. But for sole proprietor, it works out to be 20% of what you earn. Right? Sometimes when you read the IRS forms, it says 25%. That's confusing. What they mean is 25% not including the contribution or 20% including the contribution. But it's the same amount of money. All right? So that's a cool way to contribute. But there is a third way, and that's called after tax contributions. These are not Roth contributions. They're after tax contributions. So you don't get a, you don't get a tax deduction for putting the money in. And when the money comes out, that principal comes out tax free. But the earnings on an after tax contribution are fully taxable, just like the earnings on a tax deferred contribution. Whether you do it as the employee contribution or whether your employer, AKA you, does it as an employer contribution, the earnings all come out fully taxable at ordinary income tax rates. Well, that's the same way after tax contribution earnings come out. But there's a cool trick you can do. And this cool trick is often called the mega backdoor Roth IRA. Not to be confused with the backdoor Roth IRA, which you do with an IRA. The mega backdoor Roth IRA, despite its name, is not done with an IRA. It's done with a 401K. And it consists of two steps. The first step is making an after tax contribution into the account. The second step is then converting that contribution to your Roth account. So moving it from the after tax sub account into the Roth sub account. And I do this with one call to Fidelity every year, and the money's moved in there. It's no big deal. But because you didn't get a tax deduction on the contribution, there's no tax cost to the conversion. So just like the backdoor Roth IRA where it doesn't cost you to do that Roth conversion, it's the same with a mega backdoor Roth ira. The difference is you can put tons of money in there, right? If you make enough money and it doesn't take much, you don't have to make 4 or 5x what you're putting in there. It can be a lot less as an after tax contribution. So even if you're only making a high five figure amount, you can max this thing out as after tax contributions. And so it's really a sweet deal for those who. For whom. This is like a second retirement account. If you already have a 401 at your main gig and this is a second 401 and you just want to use it mostly for retirement sake savings, and you're like, well, how much can I get in there? You might be surprised how much you can get in there as a mega backdoor Roth ira. It won't be a tax deferred contribution, it'll be Roth, but it'll never be taxed again. And you can get a lot in there, right? Some additional asset protection, obviously, lots of tax protection there. It's going to grow faster in the account. It's a good deal. You just can't do that with the cookie cutter off the shelf. Totally free. So low 401 at Vanguard or Fidelity or Swap, you got to go to a customized provider, you know, like the one that's sponsoring this episode, or a few hundred dollars to get it set up. One or two hundred dollars a year to maintain it. You can make those huge contributions totally worth it. Great deal. And this is something that lots of people do to increase their retirement savings. Obviously, when you can save inside a tax protected and asset protected account as opposed to a taxable account, that is a good thing. And this is something Katie and I do every year now with our ARISA 401K. We set up the world's best employer 401K when we had to leave our solo 401. But this is something that's pretty darn easy to do if you're still allowed to use a solo 401. One thing I should have mentioned, when you have more than $250,000 in your Solo 401, you need to make sure that Form 5500EZ is filed each year. Really important. The penalty for not doing that is super high. You do not want to mistake that it's due by July 31st of the following year. If you had $250,000 or more on December 31st, you got to file that form by July. The sponsor, Mysolo401, can help you with that. Other 401 providers will usually send you some sort of a form to help you fill that out, but it's a nice benefit when someone's going to fill that form out for you, as it is a bad penalty if you forget to do so.
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
