Mega Back Door related

[Jakyasar]

As a non-DC person, I am trying to understand how this works.

A 50+ year old sole-prop client (no employees and reading online about it) contributing very large amount into a CB plan and 6% PS plus pre-tax deferral is asking me about restructuring her 401k plan with mega backdoor Roth.

Any comments on what can be done are appreciated.

[Bri]

Okay, the idea here is that she wants to get to her DC annual additions maximum, which will likely exceed the sum of the deferral max and then the 6% DC allocation.

So she does the rest as employee after-tax. as having no employees means the ACP test is passed.

As for the backdoor part of the Roth, that's just a Roth conversion of some/any of the total, including the employee after-tax, so that she's basically gotten the full DC max and it's all/some become part of a Roth account within the plan.

[Jakyasar]

Hi Bri, thank you for your information.

Speaking mathematically (I am a visual person), if making 400k of net c and for 2026:

• 100k goes to CB - no Roth here
• 32,500 of deferral - Roth
• The balance of 47,500 can be after tax contribution??? For this, the plan has to allow after tax contributions.

Let's put aside the 6% deduction or does it have to be met first?

What am I doing wrong with the math?

Of course, if a rank&file is hired ACP will be an issue.

[Bri]

All correct.  No requirement on the 6%.  (After all, any company can have employees make after-tax contributions independent of employer contributions.)

 

[Jakyasar]

Thank you for clarifying and all the information

[David D]

One additional step the client may want to do is immediately on making the After Tax Contribution, convert it to Roth so that there is no tax on the earnings.  It also might be good reinforcement to tell the client although you contributed $180,000 in this example, only report and deduct $100,000 on the 1040.  

[Jakyasar]

Hi David, good point on the earnings. Thank you