1) aray, is there any reason/benefit that you're not rolling the Nondeductible Employee Contribution (NDEC) amount into a Roth IRA, which I thought is more flexible than Roth 401k?
I may explore doing the MBR to a Roth IRA in the future, but at least for now I opted to do the in plan Roth rollover within the 401k plan with a couple things in mind -
1) Seems simpler and less risky in terms of error avoidance. Also, from research it seemed like a best practice may be to establish a separate standalone Roth IRA to be used for MBR funds, separate from my regular Roth IRA, and I'm not completely opposed to having two Roth IRAs but it would just create more management / maintenance work.
2) Asset protection appears to be better with the 401k compared to an IRA. From reading things online, I got the impression that
maybe some of the asset protection characteristics could be carried over to the Roth IRA if doing a MBR, since the funds were originally in the 401k, but then it comes back to the simplicity consideration - would I have to maintain certain documentation proving the funds were originally in a 401k to maintain any increased potential asset protection?
2) if my purpose is to maximize MBDR since we already have other rollover IRAs (ie, tax-deferred), can I skip both employee AND employer contributions and just put $58k as NDEC, then roll it over to Roth IRA? This would require only 2 accounts, traditional 401k for the NDEC, and Roth IRA, isn't it? Or is there a rule that I need to max out the $19.5k elective deferral (into Roth 401k as preferred) before tapping into the remaining amount?
I'm not aware of a rule requiring maxing out of the elective deferral before making the NDEC. I don't know if there would be any issues making the entire $58k a NDEC. I'm not sure if it's fine or not to have an NDEC account without having a regular pre-tax traditional 401k account as well.
3) what's the deadline for making the employee contribution (either elective deferral or NDEC)? Almost all brokerages say the employee part needs to be made by 12/31, but IRS Pub 560 says "Owner/employees: The employee deferrals must be elected by the end of the tax year and then can be made by the tax return filing deadline, including extensions." What exactly does "must be elected" entail? What's really funny is that eTrade told me they code all contributions made by the end of Jan to be for the previous tax year, without any special request. So sounds like I got a month to fund the contributions.
A salary reduction agreement is needed and I believe that's what "elected" is referring to. Here's an excerpt from the plan document: "A Participant who wishes to enroll as a Contributing Participant must deliver (either in writing or in any other form permitted by the IRS and the DOL) a salary reduction agreement (or agreement to make Nondeductible Employee Contributions) to the Plan Administrator."
Below are notes I have on file; I have a single member LLC taxed as an S corporation and issue wages & W-2 to myself, so not sure how these translate for your wife's situation since it doesn't sound like she takes wages, but anyways here are the contribution deadlines I follow:
IRS publication 4222:
https://www.irs.gov/pub/irs-pdf/p4222.pdf
"For plans with fewer than 100 participants, salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law."
https://www.irs.gov/pub/irs-pdf/p3151a.pdf
Business days include every calendar day other than Saturdays, Sundays, or legal holidays. The term "legal holiday" means any District of Columbia legal holiday (legal holiday is a federal holiday:
https://dchr.dc.gov/page/holiday-schedules)
I'm not sure how to reconcile the deadlines above, with the much later tax filing deadline quoted in Pub 560 and would be curious to hear a CPA reconcile these.
4) Since my wife's business is a one-person LLC, she's not paying herself a W-2 wage, and the earnings are just in the business bank account. Does this affect any ability to contribute? Does it matter if all contributions (employer & employee) come from the same business bank account?
I'm not a CPA so can't give any professional opinion here, but I can say that in my situation, both employer and employee contributions come from the same business operating account.
5) eTrade said they don't care if the contribution is pre-tax or after-tax, since they don't produce any form when we contribute. As plan admin, other than the detailed records we should keep, how are we to report contributions to IRS, either pre- or after-tax?
For after tax contributions that I'm rolling over to the Roth 401k, the CPA I talked to shared a 1040 form as an example and said that on line 5a ("Pensions and annuities") of that I'd report the gross amount that is rolled over to the Roth, and on line 5b (the right side of the same line) would report the taxable amount, if any. "If there is no taxable amount, line 5b will show zero or can be left blank".
"Depending on the information ETrade reports on the 1099-R, it may be as simple as reporting "0" on the taxable amount. In box 7 of the form 1099-R, ETrade will report a code number that represents the type of distribution/rollover, that code should indicate that it is a rollover type transaction."
6) For rollover, aray you said "As far as tax reporting when doing the in plan Roth rollover - Etrade would issue me the 1099-R, and I would set the record straight on the 1040 as far as what amount of the rollover is taxable vs. non-taxable..." Are you saying since eTrade won't distinguish what the rollover is for and taxable or not, they'll simply put the entire rollover amount on on box 1 Gross Distribution, and leave everything else blank? Aren't we dependent on them putting code G in box 7 to indicate it's a rollover not an actual distribution? Can you really "set the record straight" on 1040 if they put something wrong?
According to the CPA I talked to, Etrade will put a code to describe the type of distribution. Etrade won't distinguish if it will be taxable or non-taxable. I didn't mean to imply previously that Etrade wouldn't put any code on the 1099-R; I'm assuming they would put something in box 7, and I actually just called Etrade to confirm, and they said that yes they will put G in box 7; they also explained how they'll put the gross amount in box 1, and I was told they don't put anything in box 2 (taxable amount) because Etrade doesn't keep track of what portion of the rollover was from pre-tax vs. NDEC (after tax) funds.
7) many posters expressed concern about eTrade not being the plan administrator. Is this still a big concern for not doing this eTrade MBDR? I have no problem keeping records, since my intention is to make 1 slump sum NDEC a year (or at worst 1 elective deferral and the remaining in NDEC).
If you're going to do the MBR yourself with Etrade, I'd encourage you to just be sure to take time and review the plan document so you stay compliant long term. Keep any salary reduction agreement updated as necessary. Also monitor your inbox as every 6 years you'll need to restate the plan. If you as spouse eventually join the same solo 401k plan, pay attention to your Entry Date (would either need to be Jan. 1st or July 1st, by default, as I understand) before you start contributing. Be sure to file form 5500EZ every year once plan assets exceed $250k to avoid hefty penalty fees by the IRS. This isn't a comprehensive list, but just some things that come to mind right now.
Separate question on 3rd party service provider like mysolo401k.com. Once you establishes the solo 401k/MBDR with them, is there any way to sever ties? Obviously this will be when we no longer need to fund additional MBDR thru their after-tax contribution account.
I'm assuming it's possible to switch to a different company from a third party administrator doing a plan amendment / restatement, although haven't tried doing that myself (other than switching from Vanguard to Etrade).
Good luck and let us know how things go for you!