After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

It's come to my attention that my Etrade Solo 401(k) now allows nondeductible (after tax) employee contributions. I've been trying to learn about this option and have spoken with folks at Etrade but they don't seem well versed on it quite yet. Here are questions I have:

1) My understanding from online research is that after tax employee contributions must be made to the traditional 401(k) account, and may NOT be made straight to the Roth 401(k) account - is that correct? Or am I allowed to make an after tax contribution directly to the Roth 401(k)?

2) If I would need to make these after tax contributions to the traditional 401(k), does this mean that Etrade should be providing me with a 3rd account, to keep employer contributions separated from employee after tax contributions? Or is to be expected that, when making after tax contributions, the employer contributions may get commingled with employee after tax contributions within the same traditional 401(k) account? So far, Etrade has been telling me that a 3rd account is not available within the 401(k) to keep these after tax contributions separated.

3) Anything contributed to the traditional 401(k) gets coded automatically by Etrade as an "employer contribution". Etrade has told me that I can call in manually to ask that a contribution be reclassified as an employee contribution, but it doesn't sound like they have a way to reclassify it as an "after tax contribution". Should I contact Etrade each time to reclassify an after tax contribution as an employee contribution, or should I leave it classified as an employer contribution?

4) If a 3rd account is not going to be available for after tax contributions and I'm required to make these contributions to the same account that holds employer contributions, I'm confused / concerned about how Etrade will be able to create an accurate 1099-R each year when I do in-plan Roth rollovers each year to move funds from the traditional 401(k) to the Roth 401(k). From what I'm being told right now, sounds like the entire amount of every in-plan Roth rollover would be put on the 1099-R. However, as I understand the after tax contributions should NOT be taxable... so I would think only the employer contributions and the earnings (if any) from after tax contributions ought to be listed as taxable on the 1099-R? I don't understand how Etrade is going to keep things straight for 1099-R purposes with the funds getting commingled, and it seems like my 1099-R taxable amount would be overstated each time?

5) Any time I make an after tax contribution, I'll plan to do an in-plan Roth rollover immediately before starting to invest the funds. So I'm not expecting earnings on the after tax contributions before they arrive in the Roth account, which will hopefully simplify my recordkeeping. I'll keep track each year how much I've contributed after-tax. Once these funds are immediately rolled over to the Roth 401k (which should not be a taxable event as I understand since there won't be any associated earnings), is there any special record keeping required for after tax funds that are now in a Roth account?

By the way, Etrade gives this disclosure in the new adoption agreement about after tax contributions: "Important! If non-deductible employee contributions are permitted in this plan, it is the responsibility of the employer, plan administrator, and/or trustee (if applicable) to maintain separate accounting for these contributions. E*TRADE will not be responsible for providing separate accounting of non-deductible employee contributions and will not be responsible for tracking earnings for those contributions separately or displaying them on account statements. It is the employer and/or plan administrator’s responsibility to track and report all contributions and determine amounts eligible for distribution. These contributions do not receive the same tax treatment as Roth Elective Deferrals and will require separate accounting. Please contact a tax professional or visit irs.gov for additional guidance."

Finally, just to mention this - I understand I may now be able to do a mega backdoor Roth where I move after tax contributions directly to my Roth IRA, but at least for now I'd like to focus on just doing the in plan Roth rollovers and moving these after tax funds to the Roth 401(k).

Thank you in advance for any help or information you all are able to provide!
Last edited by aray on Sun Aug 22, 2021 5:51 pm, edited 1 time in total.
User avatar
illumination
Posts: 3160
Joined: Tue Apr 02, 2019 6:13 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by illumination »

Just to give you my experience, I went down this road with E-Trade purely because they were about the only brokerage that had the option of a Roth 401k for a solo 401k plan. The people I talked to at E-Trade were largely clueless and gave me all sorts of contradictory information that didn't jive with some of the experts here. I ended up not going with them just because I felt the support wasn't there and was afraid of a tax nightmare. So make sure you check and re-check everything before you do this and don't rely solely on their support.

Solo Roth 401k and MegaBackDoor Roths are incredibly confusing (at least for a layman like me) I ended up paying a plan administrator that worked with my brokerage for a nominal fee for the "hand holding". In my case, it was Ubiquity, they were recommended by Schwab. And they also prepare the Form 5500. If I could have done it all over again, I would have used something like Solo401k.com. Not really happy with Ubiquity either, but I largely now no longer need their support.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by aray »

Thank you for providing those 401k provider names, will keep those on file. So far I haven't done anything too complicated and have felt comfortable with Etrade (although I agree, this isn't the first time that I've spoke with someone who didn't seem to have in-depth knowledge of Solo 401ks), but this after tax contribution is new territory for me and I want to be sure I'm going down the right path before taking action so tax issues don't pop up down the road! It seems like once I understand the facts and basics, it hopefully shouldn't be too challenging to maintain things going forward.

I'm hoping some folks in this community might be able to shed some additional light on my questions...
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by HomeStretch »

aray wrote: Sat Aug 21, 2021 8:54 am … By the way, Etrade gives this disclosure in the new adoption agreement about after tax contributions: "Important! If non-deductible employee contributions are permitted in this plan, it is the responsibility of the employer, plan administrator, and/or trustee (if applicable) to maintain separate accounting for these contributions. …
The plan adoption agreement excerpt above says “if” so it’s not clear to me whether or not a mega backdoor can be done by you in their no-fee mainstream plan.

It will be a big development if in fact the mainstream prototype e*Trade Solo 401k plan now allows you to do a mega backdoor easily and fir no additional cost. Up until now, I believe a mega backdoor could only be done in most of the mainstream plans if you used a third-party administrator for a fee.

Keep us updated!
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by aray »

It says "if" because the new Etrade adoption agreement (in Section 3, Part C) gives you the choice of whether or not you want to allow after tax contributions (I of course selected "yes"). In-plan Roth conversions are allowed if you complete Etrade's In-Plan Roth Rollover Adoption Agreement Amendment, so at least the in-plan mega backdoor Roth appears to now be possible with Etrade if you're okay moving funds to the Roth 401k. An Etrade rep I spoke with earlier in the week indicated that I could do the mega backdoor Roth with a Roth IRA as well, although I'm not certain if that's accurate information. I've already successfully done an in-plan Roth rollover when I moved employer contribution funds from the traditional to the Roth 401k and Etrade has a formal "Direct In-Plan Roth Rollover Request" form for doing that. I was assured on the phone that I could do the in plan Roth rollover with after tax contributions as well.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

aray wrote: Sat Aug 21, 2021 12:52 pm It says "if" because the new Etrade adoption agreement (in Section 3, Part C) gives you the choice of whether or not you want to allow after tax contributions (I of course selected "yes"). In-plan Roth conversions are allowed if you complete Etrade's In-Plan Roth Rollover Adoption Agreement Amendment, so at least the in-plan mega backdoor Roth appears to now be possible with Etrade if you're okay moving funds to the Roth 401k. An Etrade rep I spoke with earlier in the week indicated that I could do the mega backdoor Roth with a Roth IRA as well, although I'm not certain if that's accurate information. I've already successfully done an in-plan Roth rollover when I moved employer contribution funds from the traditional to the Roth 401k and Etrade has a formal "Direct In-Plan Roth Rollover Request" form for doing that. I was assured on the phone that I could do the in plan Roth rollover with after tax contributions as well.
Interesting. Isee what your saying. I was just reviewing:
https://content.etrade.com/etrade/estat ... an_App.pdf
and it seems they have added the ability to do nondeductible contributions... there is a very important disclaimer on page 12, that thye do not actually do the accounting for the nondeductible contributions.....

I think the brain trust will have to think through what actually has to be done to be compliant.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by HomeStretch »

Soon2BXProgrammer wrote: Sat Aug 21, 2021 1:05 pm … I think the brain trust will have to think through what actually has to be done to be compliant.
The tricky part to self-administering a Solo 401k plan that allows after-tax contributions/MBR will be properly tracking the pretax, after-tax and Roth sub-accounts amounts, including (among other things) tracking the employee and employer components separately and allocating earnings and distributions properly.

Some who use a Solo 401k plan may be willing and able to do so competently. OP, it will be informative to read your updates on the process. But IMO most people who are considering MBRs in a Solo 401k plan are probably better off paying the fee to a TPA to manage it. I see a lot of forum threads about non-MBR Solo 401k plan issues when an OP is a plan administrator (no TPA is used), such as (1) employer contribution calculation issues, (2) correcting over contributions, (3) completing Form 5500-EZ incorrectly or not timely or not at all, etc.
Last edited by HomeStretch on Sat Aug 21, 2021 2:27 pm, edited 1 time in total.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

HomeStretch wrote: Sat Aug 21, 2021 1:20 pm
Soon2BXProgrammer wrote: Sat Aug 21, 2021 1:05 pm … I think the brain trust will have to think through what actually has to be done to be compliant.
The tricky part to self-administering a Solo 401k plan that allows after-tax contributions/MBR will be properly tracking the pretax, after-tax and Roth sub-accounts amounts, including (among other things) tracking the employee and employer components separately and allocating earnings and distributions properly.

Some who use a Solo 401k plan may be willing and able to do so competently. So it will be informative to read OP’s updates on the process. But IMO most people who are considering MBRs in a Solo 401k plan are probably better off paying the fee to a TPA to manage it. I see a lot of forum threads about non-MBR Solo 401k plan issues when an OP is a plan administrator (no TPA is used), such as (1) employer contribution calculation issues, (2) correcting over contributions, (3) completing Form 5500-EZ incorrectly or not timely or not at all, etc.
I am in agreement that this isnt for the feint of heart. Sorry that wasn't clear.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by HomeStretch »

Soon2BXProgrammer wrote: Sat Aug 21, 2021 2:16 pm I am in agreement that this isnt for the feint of heart. Sorry that wasn't clear.
Agree and you were absolutely clear. :sharebeer
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by aray »

Learning how to correctly calculate employer contributions did take me a bit of time. I can see how small mistakes could compound and create issues down the road, so I agree if you're going to self administer need to invest the time to learn how to do it properly.

It seems to me that administering the MBR may be simpler if I just keep it all inside the 401k rather than transfer out to a Roth IRA. My intention is to transfer after tax contributions immediately to the Roth 401k and then invest the money once inside the Roth 401k, and then I won't have to worry so much about earnings that accrue while in the traditional 401k. I'm doing this with employer contributions as well - transferring immediately to the Roth 401k. So with the current plan, I'm not going to have any material earnings that accrue outside of the Roth 401k account... and then once funds are in the Roth 401k I don't think I have to worry so much about keeping track of pro-rata situations of contributions vs. earnings, right? I say I won't have any "material" earnings in the traditional 401k account because even though I quickly did an in-plan Roth rollover of 100% of an employer contribution earlier this year, a little while after that in-plan rollover $0.01 appeared in my traditional 401k account.. so apparently I earned a penny from the employer contribution. I can just rollover that penny to the Roth 401k the next time I do an in-plan rollover and then I'll only owe taxes on the one cent and it'll be fine, right?

I'll keep annual contribution and in-plan Roth rollover records regardless, but it just seems more straightforward once the funds get to the Roth 401k. If anyone knows of any other specific records I need to keep of funds inside the Roth 401k, please let me know.

Doing the MBR to the Roth 401k instead of the Roth IRA also may have some potential advantages from an asset protection standpoint: https://www.irafinancialgroup.com/learn ... solo-401k/
On the other hand, would a MBR to a Roth IRA count as a rollover IRA for full bankruptcy protection purposes as described here?:
https://www.investopedia.com/ask/answer ... ruptcy.asp
...if so, that's still more record-keeping required, though, to prove down the road that IRA funds are from a rollover, and still seems simpler to just keep the money in a Roth 401k to begin with...

Oh, and if any one would like to chime in on any questions from my original post at the top of the thread, I'd still love to hear more feedback on those questions :happy
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

aray wrote: Sat Aug 21, 2021 2:54 pm Oh, and if any one would like to chime in on any questions from my original post at the top of the thread, I'd still love to hear more feedback on those questions :happy
I have a lot of the same questions you do... and i'm not sure how etrade will create correct 1099-R's either, or if they are going to ask you what the correct value is. the same goes for a lot of your questions.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by aray »

Thank you for the responses so far. I'm also hoping that as a little more time passes, the Etrade employees will become more knowledgeable on this new after tax contribution option. It appears to be a very new feature right now, and a lady I talked with yesterday at Etrade didn't even know this new option existed until I pointed it out to her in the adoption agreement.
mmp123
Posts: 2
Joined: Sun Jan 05, 2020 8:14 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by mmp123 »

Not sure how to tag someone here. @SpiritRider memberlist.php?mode=viewprofile&u=717 is very knowledgeable and they may have something important to add here.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

mmp123 wrote: Sun Aug 22, 2021 10:37 am Not sure how to tag someone here. @SpiritRider memberlist.php?mode=viewprofile&u=717 is very knowledgeable and they may have something important to add here.
Tagged for you, unfortunately he hasn't been seen in a 6 months.
Spirit Rider wrote: Ping
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
SuzBanyan
Posts: 2008
Joined: Thu Jun 02, 2016 11:20 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by SuzBanyan »

From a 2018 post from SpiritRider:

“Etrade does support an In-Plan Roth Rollover (IRR) option, but that or in-services rollovers is only 1/2 of a Mega Backdoor Roth. The plan must support employee after-tax contributions. However, here is the relevant section from the Etrade one-participant 401k plan document.

"Nondeductible Employee Contribution - Nondeductible Employee Contribution are amounts you contributed to a prior Plan on an after-tax basis. The earnings on these contributions accumulate tax-free until paid out of the plan. The plan does not allow you to contribute, transfer or roll over Nondeductible Employee Contributions to this Plan."

Therefore, the only way you should be able to make employee after-tax contributions to an Etrade one-participant 401k is with the use of an amended or different plan document. What an Etrade CSR says or doesn't say to you does not absolve you as the plan sponsor of a 401k from following the plan document. Failure to do so is a serious plan error, subject to IRS sanctions up to disqualification of the plan.”

viewtopic.php?t=252951

Aray: have you reviewed the plan document for the Etrade solo 401k, particularly the definitions? Has it changed in the current document from the one quoted above?
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

SuzBanyan wrote: Sun Aug 22, 2021 2:00 pm Aray: have you reviewed the plan document for the Etrade solo 401k, particularly the definitions? Has it changed in the current document from the one quoted above?
Yes, both the adoption agreement and plan document has changed:

The new adoption agreement states:
Part C. Nondeductible Employee Contributions
Indicate whether or not you will permit Employees to make non-deductible (after-tax) contributions.
Important! If non-deductible employee contributions are permitted in this plan, it is the responsibility of the employer, plan
administrator, and/or trustee (if applicable) to maintain separate accounting for these contributions. E*TRADE will not be responsible
for providing separate accounting of non-deductible employee contributions and will not be responsible for tracking earnings for
those contributions separately or displaying them on account statements. It is the employer and/or plan administrator’s responsibility
to track and report all contributions and determine amounts eligible for distribution. These contributions do not receive the same
tax treatment as Roth Elective Deferrals and will require separate accounting. Please contact a tax professional or visit
irs.gov for additional guidance.
The plan document has lots of references to nondeductible contribution including:
https://content.etrade.com/etrade/estat ... ooklet.pdf
Nondeductible Employee Contribution – Nondeductible Employee Contributions are amounts you contributed to a prior Plan on an after-tax basis. The earnings on these contributions accumulate tax-free until paid out of the Plan.
Last edited by Soon2BXProgrammer on Sun Aug 22, 2021 2:37 pm, edited 1 time in total.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by retiredjg »

Is Etrade just offering the document and not offering the administrator services? In other words, would Aray (our original poster) actually be the plan administrator?

That would be similar to the other places that offer a document but not the administrator service....might be a slippery slope for people with no experience in plan administration.

Soon2BX...are you using this plan yourself?
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

retiredjg wrote: Sun Aug 22, 2021 2:21 pm Is Etrade just offering the document and not offering the administrator services? In other words, would Aray (our original poster) actually be the plan administrator?

That would be similar to the other places that offer a document but not the administrator service....might be a slippery slope for people with no experience in plan administration.

Soon2BX...are you using this plan yourself?
Not yet, i've been reviewing it, because I might switch. This is the set of documents that is tied to: https://us.etrade.com/what-we-offer/our ... idual-401k which is the plan that historically etrade has been the administrator for you.. Just like the solo plans at fidelity/vanguard/etc/etc/etc... It isn't clear exactly what accounting/responsibilities that etrade is saying that they wont do with respect to using this feature.. I am still researching. This is definitely a revision to the documents vs what they had said a year or two ago the last time i looked at them.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by aray »

Aray: have you reviewed the plan document for the Etrade solo 401k, particularly the definitions? Has it changed in the current document from the one quoted above?
Yes, here's an example excerpt from the new plan document:
1. Distribution of Rollover, Transfer, and Nondeductible Employee Contributions – The following rules will apply with respect to
entitlement to distribution of rollover, transfer, and Nondeductible Employee Contributions.
a. Entitlement to Distribution – Rollover contributions (including rollovers of Nondeductible Employee Contributions) and
earnings thereon may be distributed at any time upon request. Transfer contributions may be distributed at any time upon request.


As far as the plan administrator, here's what the new / current plan document says:
Your Employer is responsible for the day-to-day administration of the Plan and is the Plan Administrator. To assist in operating the Plan efficiently
and accurately, your Employer may appoint additional persons or organizations to act on its behalf or to perform certain functions.


Under an Establishment and Maintenance section of the plan document, here are some figures the Plan Administrator should track:
The Plan Administrator shall establish and maintain an Individual Account in the name of each
Participant to reflect the total value of their interest in the Fund (including but not limited to Employer Contributions and earnings
thereon). Each Individual Account established hereunder will consist of such subaccounts as may be needed for each Participant,
including:
1. a subaccount to reflect Employer Contributions allocated on behalf of a Participant;
2. a subaccount to reflect a Participant’s rollover contributions;
3. a subaccount to reflect a Participant’s transfer contributions;
4. a subaccount to reflect a Participant’s Nondeductible Employee Contributions;
5. a subaccount to reflect a Participant’s Pre-Tax Elective Deferrals; and
6. a subaccount to reflect a Participant’s Roth Elective Deferrals.
The Plan Administrator may establish additional accounts as it may deem necessary for the proper administration of the Plan.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by Soon2BXProgrammer »

aray wrote: Sun Aug 22, 2021 5:45 pm
Aray: have you reviewed the plan document for the Etrade solo 401k, particularly the definitions? Has it changed in the current document from the one quoted above?
Yes, here's an example excerpt from the new plan document:
1. Distribution of Rollover, Transfer, and Nondeductible Employee Contributions – The following rules will apply with respect to
entitlement to distribution of rollover, transfer, and Nondeductible Employee Contributions.
a. Entitlement to Distribution – Rollover contributions (including rollovers of Nondeductible Employee Contributions) and
earnings thereon may be distributed at any time upon request. Transfer contributions may be distributed at any time upon request.


As far as the plan administrator, here's what the new / current plan document says:
Your Employer is responsible for the day-to-day administration of the Plan and is the Plan Administrator. To assist in operating the Plan efficiently
and accurately, your Employer may appoint additional persons or organizations to act on its behalf or to perform certain functions.


Under an Establishment and Maintenance section of the plan document, here are some figures the Plan Administrator should track:
The Plan Administrator shall establish and maintain an Individual Account in the name of each
Participant to reflect the total value of their interest in the Fund (including but not limited to Employer Contributions and earnings
thereon). Each Individual Account established hereunder will consist of such subaccounts as may be needed for each Participant,
including:
1. a subaccount to reflect Employer Contributions allocated on behalf of a Participant;
2. a subaccount to reflect a Participant’s rollover contributions;
3. a subaccount to reflect a Participant’s transfer contributions;
4. a subaccount to reflect a Participant’s Nondeductible Employee Contributions;
5. a subaccount to reflect a Participant’s Pre-Tax Elective Deferrals; and
6. a subaccount to reflect a Participant’s Roth Elective Deferrals.
The Plan Administrator may establish additional accounts as it may deem necessary for the proper administration of the Plan.
do you have a link to the document that is from?
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
SuzBanyan
Posts: 2008
Joined: Thu Jun 02, 2016 11:20 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by SuzBanyan »

Soon2BXProgrammer wrote: Sun Aug 22, 2021 5:55 pm
aray wrote: Sun Aug 22, 2021 5:45 pm
Aray: have you reviewed the plan document for the Etrade solo 401k, particularly the definitions? Has it changed in the current document from the one quoted above?
Yes, here's an example excerpt from the new plan document:
1. Distribution of Rollover, Transfer, and Nondeductible Employee Contributions – The following rules will apply with respect to
entitlement to distribution of rollover, transfer, and Nondeductible Employee Contributions.
a. Entitlement to Distribution – Rollover contributions (including rollovers of Nondeductible Employee Contributions) and
earnings thereon may be distributed at any time upon request. Transfer contributions may be distributed at any time upon request.


As far as the plan administrator, here's what the new / current plan document says:
Your Employer is responsible for the day-to-day administration of the Plan and is the Plan Administrator. To assist in operating the Plan efficiently
and accurately, your Employer may appoint additional persons or organizations to act on its behalf or to perform certain functions.


Under an Establishment and Maintenance section of the plan document, here are some figures the Plan Administrator should track:
The Plan Administrator shall establish and maintain an Individual Account in the name of each
Participant to reflect the total value of their interest in the Fund (including but not limited to Employer Contributions and earnings
thereon). Each Individual Account established hereunder will consist of such subaccounts as may be needed for each Participant,
including:
1. a subaccount to reflect Employer Contributions allocated on behalf of a Participant;
2. a subaccount to reflect a Participant’s rollover contributions;
3. a subaccount to reflect a Participant’s transfer contributions;
4. a subaccount to reflect a Participant’s Nondeductible Employee Contributions;
5. a subaccount to reflect a Participant’s Pre-Tax Elective Deferrals; and
6. a subaccount to reflect a Participant’s Roth Elective Deferrals.
The Plan Administrator may establish additional accounts as it may deem necessary for the proper administration of the Plan.
do you have a link to the document that is from?
It’s in Section 7.02 of the Plan Document you linked to above: https://content.etrade.com/etrade/estat ... ooklet.pdf

That document has a 6/2020 revision date on it, so it looks like the changes were effective then.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by fyre4ce »

I've had a steady interest in this possibility over the last few years. From what I understand, in order to do a MBR properly/legally, you need the following things:
  1. A plan agreement that supports the steps necessary for MBR
  2. A separate after-tax (non-deductible) account to hold contributions
  3. Accounting necessary to prepare and file a 1099-R for the rollover
From what I can tell, E*Trade provides #1 but not #2 and #3. I'm sure it's possible to kludge a system together and it might even pass regulatory muster, but I'd be really worried about an audit if doing anything obviously improper (ie. contributing nondeductible contributions to the pre-tax account and then rolling them into Roth). The IRS is actually pretty forgiving with mistakes on personal taxes, but much less so with business taxes. If an audit discovers this or similar behavior, they have the authority to force dissolution of the plan and distribution of plan assets. I wouldn't want to take that risk.

If E*Trade is able to offer a third (after-tax) sub account, then I think the game would change considerably. I would consider preparing my own 1099-R for the transfer. It can't be *that* hard to figure out; I doubt harder than a 5500-EZ, the first of which I prepared this year. But for now it seems like they are refusing to do that. If the situation changes, I will keep my eye out.
sorengard
Posts: 65
Joined: Mon May 29, 2017 11:59 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by sorengard »

I don't know what's more amazing: the OP's post, which is longer than any post or email I've ever written, or the replies of those who took the time to read it and respond. If something is this complicated, should you really be attempting it?

Don't get me started on people who list twenty or thirty funds in their 401k posts when Boggle's recommendation was for three funds and there are actually lifecycle/target fund which include an entire AA in them plus a glide path. This perverse desire for complexity without any added benefit is insane.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by fyre4ce »

sorengard wrote: Mon Aug 23, 2021 12:04 am I don't know what's more amazing: the OP's post, which is longer than any post or email I've ever written, or the replies of those who took the time to read it and respond. If something is this complicated, should you really be attempting it?

Don't get me started on people who list twenty or thirty funds in their 401k posts when Boggle's recommendation was for three funds and there are actually lifecycle/target fund which include an entire AA in them plus a glide path. This perverse desire for complexity without any added benefit is insane.
The MBR is a potentially very valuable tax strategy, allowing $10,000's per year to be put away into Roth accounts, versus left outside where they have more exposure to the tax man and potential creditors. And, BH in general is a very "do it yourself" community when it comes to finances- investments, taxes, etc. So on these two points the OP and I are in alignment. And the process is not actually that complicated. I'm surprised that there are no major brokerages that offer this feature. I feel like for a modest investment they would be able to greatly increase their marketshare. But, the state of affairs right now seems to be that if one wants a MBR in a Solo 401k, the choices are to purchase plan documents and do all the mechanics yourself, or to hire a TPA to do it for you (roughly $500/year).
sorengard
Posts: 65
Joined: Mon May 29, 2017 11:59 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by sorengard »

fyre4ce wrote: Mon Aug 23, 2021 12:38 am
sorengard wrote: Mon Aug 23, 2021 12:04 am I don't know what's more amazing: the OP's post, which is longer than any post or email I've ever written, or the replies of those who took the time to read it and respond. If something is this complicated, should you really be attempting it?

Don't get me started on people who list twenty or thirty funds in their 401k posts when Boggle's recommendation was for three funds and there are actually lifecycle/target fund which include an entire AA in them plus a glide path. This perverse desire for complexity without any added benefit is insane.
The MBR is a potentially very valuable tax strategy, allowing $10,000's per year to be put away into Roth accounts, versus left outside where they have more exposure to the tax man and potential creditors. And, BH in general is a very "do it yourself" community when it comes to finances- investments, taxes, etc. So on these two points the OP and I are in alignment. And the process is not actually that complicated. I'm surprised that there are no major brokerages that offer this feature. I feel like for a modest investment they would be able to greatly increase their marketshare. But, the state of affairs right now seems to be that if one wants a MBR in a Solo 401k, the choices are to purchase plan documents and do all the mechanics yourself, or to hire a TPA to do it for you (roughly $500/year).
Agree with most of what you wrote including the value of the MBR. You're wrong on BH philosophy but that's another post. Issue here is I've never seen anyone ask about the mechanics and ET like this. Something is wrong in the OP in that it doesn't pass the smell test. There are countless post on this forum asking about MBR and everyone seems to be able to execute it just fine without a thousand word post. OP is clearly missing something.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by Soon2BXProgrammer »

sorengard wrote: Mon Aug 23, 2021 12:55 am
fyre4ce wrote: Mon Aug 23, 2021 12:38 am
sorengard wrote: Mon Aug 23, 2021 12:04 am I don't know what's more amazing: the OP's post, which is longer than any post or email I've ever written, or the replies of those who took the time to read it and respond. If something is this complicated, should you really be attempting it?

Don't get me started on people who list twenty or thirty funds in their 401k posts when Boggle's recommendation was for three funds and there are actually lifecycle/target fund which include an entire AA in them plus a glide path. This perverse desire for complexity without any added benefit is insane.
The MBR is a potentially very valuable tax strategy, allowing $10,000's per year to be put away into Roth accounts, versus left outside where they have more exposure to the tax man and potential creditors. And, BH in general is a very "do it yourself" community when it comes to finances- investments, taxes, etc. So on these two points the OP and I are in alignment. And the process is not actually that complicated. I'm surprised that there are no major brokerages that offer this feature. I feel like for a modest investment they would be able to greatly increase their marketshare. But, the state of affairs right now seems to be that if one wants a MBR in a Solo 401k, the choices are to purchase plan documents and do all the mechanics yourself, or to hire a TPA to do it for you (roughly $500/year).
Agree with most of what you wrote including the value of the MBR. You're wrong on BH philosophy but that's another post. Issue here is I've never seen anyone ask about the mechanics and ET like this. Something is wrong in the OP in that it doesn't pass the smell test. There are countless post on this forum asking about MBR and everyone seems to be able to execute it just fine without a thousand word post. OP is clearly missing something.
99.5% of people doing the MBR are doing it as a W2 employee, in a plan that is already established.
.25% of people are doing if through EmployeeFiduciary as a solo401k plan are paying $1500 or so a year for the plan. (low risk way for solo401k)
.25% of people are doing it through mysolo401k and they are only getting plan documents and this has been discussed extensively. (higher risk way for solo401k)

The op is saying it looks like etrade might support it in its solo plan, but it isn't clear how it will work from an administrative perspective. (not sure where it falls on the risk spectrum)

In my mind the op is spot on in having a thousand word post.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

I probably could have been more concise in asking the original questions and I apologize if the original post was too wordy. In any case, I believe I have some important and legitimate questions, which Etrade has not been able to answer. The potential benefits of a MBR are substantial, but the repercussions of doing this incorrectly may also be substantial. Given that I have decades before I'll be retiring, I'm trying to build a good foundation and ensure I'm on the right path before I use Etrade's new after tax contribution feature.

Is there anyone in the Bogleheads community currently doing a MBR where your 401k provider has NOT provided you with a separate sub-account that's exclusively used for holding after tax-contributions, or is everyone who's doing the MBR in this community provided with a separate account? The importance of a separate account was mentioned in a recent post, and it makes sense to me that it may be a prerequisite for doing this properly.

I appreciate the responses so far - thank you!
bradpevans
Posts: 801
Joined: Sun Apr 08, 2018 1:09 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by bradpevans »

aray wrote: Sat Aug 21, 2021 2:54 pm <snip>
It seems to me that administering the MBR may be simpler if I just keep it all inside the 401k rather than transfer out to a Roth IRA. My intention is to transfer after tax contributions immediately to the Roth 401k and then invest the money once inside the Roth 401k, and then I won't have to worry so much about earnings that accrue while in the traditional 401k. I'm doing this with employer contributions as well - transferring immediately to the Roth 401k. So with the current plan, I'm not going to have any material earnings that accrue outside of the Roth 401k account... and then once funds are in the Roth 401k I don't think I have to worry so much about keeping track of pro-rata situations of contributions vs. earnings, right?
<snip>
in the general W2 plan, the *employer* match/contributions are always placed in the pre-tax accounts. Not sure how that works with solo (but would be great if you can get employer and employee contributions into Roth tax treatment bucket
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

Employer contributions go to the pretax traditional 401k in my Solo 401k, and I use the in plan Roth rollover feature to move those funds to the Roth 401k account.

I have a choice where to put employee elective deferral contributions, and I always choose the Roth 401k account.

It's the 3rd type of contribution, employee after tax contributions, that I'm unclear how to proceed with...
mmp123
Posts: 2
Joined: Sun Jan 05, 2020 8:14 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by mmp123 »

Aray, Wouldn't Etrade let you have 3 different accounts? 1. Pretax, 2. ROth and 3 After-tax?
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by HomeStretch »

aray wrote: Mon Aug 23, 2021 6:40 am … Is there anyone in the Bogleheads community currently doing a MBR where your 401k provider has NOT provided you with a separate sub-account that's exclusively used for holding after tax-contributions, or is everyone who's doing the MBR in this community provided with a separate account? …

I believe the question could/should be reframed to ask more specifically:
“Is there anyone in the Bogleheads community currently doing a MBR in a mainstream no-fee Solo 401k plan completely administered by you (and not a paid third-party administrator (TPA))? If so, please share how you are self-administering the MBR process including the sub-accounts tracking, Form 1099-R reporting and Form 5500-EZ reporting, if applicable.”

OP, not sure if you will receive an experienced response to the question as yours is the first post I have read in this forum asking about self-administering a mainstream Solo 401k plan offering MBR. Past threads about MBRs in mainstream Fidelity and Vanguard Solo 401k plans have involved using a TPA for a fee for the front end with V or F providing the back end. I don’t believe you will find a mainstream provider who will handle the MBR sub-accounts and Form 1099R for no fee, if at all. It’s just not profitable for them.

In the absence of any on point responses, an alternative could be to talk with a low cost TPA who works with E*Trade to have them administer the plan for one year so you can see how it’s done, then amend your plan to E*Trade’s mainstream plan and take over the administration. The TPA one-time and annual fees are not that expensive.

Please keep the thread updated as to your progress.

This would be a great topic for White Coat Investor to tackle!
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

Aray, the one place we know that does what you want is Employee Fiduciary. You might want to check with them.

They provide the documents that support MBR in a Solo 401k and they also act as your plan administrator. It costs more than the two or three places that just provide the plan documents and some guidance.

Apparently etrade wants to get on this bandwagon and they are just not yet ready yet.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

Trying out a low cost TPA or Employee Fiduciary are routes I may look into, thank you.

I actually just called Etrade's Tax Retirement & Cost Basis department (877-921-2434) and talked to someone very knowledgeable and helpful. Here are some updates:
  • He confirmed that this new plan document has been in the works since last year, but that it was just released to the public a few weeks ago as Etrade recently got the clearance from the regulators, he said, which takes some time
  • Etrade WILL issue a 1099-R for an in-plan Roth rollover for the gross amount, and they will indicate on the form how they don't know what amount is taxable vs. non-taxable. He said, for example, Etrade doesn't know if a customer is getting a distribution for a hardship or a home purchase and so they don't get into whether a distribution is taxable or not taxable and they'll just report the full amount on the 1099-R
  • It IS possible to open a 3rd account exclusively for after tax contributions, and it IS possible to do an in-plan Roth rollover from that 3rd account to the Roth account. This would require submitting a brand new 401k application, though, I was told, with the same sequence number, and that would generate a new login profile although he said I could call Etrade to merge the logins to one login profile. The application process is now online with Docusign, I was told. The 3rd account would involve the same plan name and same sequence number, he said.
  • Etrade is not doing reporting on contributions, and they're not going to know if someone has over-contributed, so it's up to the customer to keep track of contributions.
  • It's currently not possible to code an after tax contribution as "after tax contribution", so the current choices are for it to be coded as either employee or employer contribution, but if Etrade isn't reporting contributions, not sure how big an issue this is...
I don't think I'm supposed to have multiple 401ks open at the same time, and I'm unclear if this would create any issues if I submitted a new application for a 3rd account that has the same Plan Name and same sequence number.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by fyre4ce »

sorengard wrote: Mon Aug 23, 2021 12:55 am
fyre4ce wrote: Mon Aug 23, 2021 12:38 am
sorengard wrote: Mon Aug 23, 2021 12:04 am I don't know what's more amazing: the OP's post, which is longer than any post or email I've ever written, or the replies of those who took the time to read it and respond. If something is this complicated, should you really be attempting it?

Don't get me started on people who list twenty or thirty funds in their 401k posts when Boggle's recommendation was for three funds and there are actually lifecycle/target fund which include an entire AA in them plus a glide path. This perverse desire for complexity without any added benefit is insane.
The MBR is a potentially very valuable tax strategy, allowing $10,000's per year to be put away into Roth accounts, versus left outside where they have more exposure to the tax man and potential creditors. And, BH in general is a very "do it yourself" community when it comes to finances- investments, taxes, etc. So on these two points the OP and I are in alignment. And the process is not actually that complicated. I'm surprised that there are no major brokerages that offer this feature. I feel like for a modest investment they would be able to greatly increase their marketshare. But, the state of affairs right now seems to be that if one wants a MBR in a Solo 401k, the choices are to purchase plan documents and do all the mechanics yourself, or to hire a TPA to do it for you (roughly $500/year).
Agree with most of what you wrote including the value of the MBR. You're wrong on BH philosophy but that's another post. Issue here is I've never seen anyone ask about the mechanics and ET like this. Something is wrong in the OP in that it doesn't pass the smell test. There are countless post on this forum asking about MBR and everyone seems to be able to execute it just fine without a thousand word post. OP is clearly missing something.
There's a big difference between a MBR at an employer who has a plan that allows it, and doing an MBR with your own Solo 401k. The latter is what's being discussed here. Again, it's possible to do it by hiring a TPA, but that involves some hassle of switching plans, and also an initial and on-going cost, which is less desirable in my circumstance of wanting to do a MBR only occasionally, not every year.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by fyre4ce »

aray wrote: Mon Aug 23, 2021 8:59 am Trying out a low cost TPA or Employee Fiduciary are routes I may look into, thank you.

I actually just called Etrade's Tax Retirement & Cost Basis department (877-921-2434) and talked to someone very knowledgeable and helpful. Here are some updates:
  • He confirmed that this new plan document has been in the works since last year, but that it was just released to the public a few weeks ago as Etrade recently got the clearance from the regulators, he said, which takes some time
  • Etrade WILL issue a 1099-R for an in-plan Roth rollover for the gross amount, and they will indicate on the form how they don't know what amount is taxable vs. non-taxable. He said, for example, Etrade doesn't know if a customer is getting a distribution for a hardship or a home purchase and so they don't get into whether a distribution is taxable or not taxable and they'll just report the full amount on the 1099-R
  • It IS possible to open a 3rd account exclusively for after tax contributions, and it IS possible to do an in-plan Roth rollover from that 3rd account to the Roth account. This would require submitting a brand new 401k application, though, I was told, with the same sequence number, and that would generate a new login profile although he said I could call Etrade to merge the logins to one login profile. The application process is now online with Docusign, I was told. The 3rd account would involve the same plan name and same sequence number, he said.
  • Etrade is not doing reporting on contributions, and they're not going to know if someone has over-contributed, so it's up to the customer to keep track of contributions.
  • It's currently not possible to code an after tax contribution as "after tax contribution", so the current choices are for it to be coded as either employee or employer contribution, but if Etrade isn't reporting contributions, not sure how big an issue this is...
I don't think I'm supposed to have multiple 401ks open at the same time, and I'm unclear if this would create any issues if I submitted a new application for a 3rd account that has the same Plan Name and same sequence number.
I called Etrade at the number you listed and tried to get more information about a possible 3rd (after-tax) account, and any 1099-R's they may issue in connection with rollovers from that account. The guy I spoke with didn't seem knowledgable at all and told me they do not offer an after-tax sub-account. :oops: Looks like they are taking steps toward adding this capability but aren't quite there yet.
placeholder
Posts: 8375
Joined: Tue Aug 06, 2013 12:43 pm

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by placeholder »

bradpevans wrote: Mon Aug 23, 2021 6:54 am in the general W2 plan, the *employer* match/contributions are always placed in the pre-tax accounts. Not sure how that works with solo (but would be great if you can get employer and employee contributions into Roth tax treatment bucket
Employer contributions have to be pretax because it's a deduction for the business so someone has to pay the tax somewhere along the line but of course if the plan supports roth conversion you can convert the employer to roth that way and pay the tax upfront.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax 401(k) Questions - Etrade Solo 401(k)

Post by fyre4ce »

placeholder wrote: Mon Aug 23, 2021 5:25 pm
bradpevans wrote: Mon Aug 23, 2021 6:54 am in the general W2 plan, the *employer* match/contributions are always placed in the pre-tax accounts. Not sure how that works with solo (but would be great if you can get employer and employee contributions into Roth tax treatment bucket
Employer contributions have to be pretax because it's a deduction for the business so someone has to pay the tax somewhere along the line but of course if the plan supports roth conversion you can convert the employer to roth that way and pay the tax upfront.
This is correct. Theoretically, it could be possible to contribute employer contributions as Roth and then treat them as nondeductible expenses on the corporate tax return, but the IRS does not allow this. The two options for effectively contributing employer contributions as Roth are:
  1. contribute employer contributions as pre-tax, and then convert to Roth, either immediately or at another time of your choosing, or
  2. use a mega-backdoor Roth approach, not contributing through the employer at all, and contributing the $38,500 as employee after-tax contributions, then rolling over into a Roth account
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

Brad Albert is the guy I talked with this morning at the number I gave earlier (877-921-2434). I asked if he had an email and he said they don't give emails but that I could call back and ask for him. He did have to check with some folks to confirm it would be okay and admitted that they're still learning how it'll all work since this is a new contribution they haven't allowed before, but after consulting with his team he confirmed that it is possible to submit a new application for a 3rd account. They don't have the coding ability currently to code contributions to that 3rd account as after tax contributions (so it's not officially going to be called an after tax sub account at the moment), but that's what you could use it for to make sure you keep after tax contributions separated. And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.

When setting up the 3rd account, it would be ideal if there was an easy way to document in the adoption agreement how the account is only being set up for after tax contributions.. I would just feel more comfortable and confident with the whole thing if there was something in writing somewhere about the purpose of the 3rd account. For example, in Section 3 of the adoption agreement, it would be nice if I could say No to both elective deferrals and employer contributions, and only say Yes to the nondeductible (after tax) employee contributions. Maybe the Other Plan Information Attachment at the end of the adoption agreement packet has potential as a space for defining the purpose of the 3rd account... Hopefully Etrade will continue to develop this new offering.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

aray wrote: Mon Aug 23, 2021 9:15 pm And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.
Heads up...from other discussions, I think this may require another (4th) account because this money must be accounted for separately from ordinary Roth 401k (which results from Roth 401k contributions).
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by Soon2BXProgrammer »

retiredjg wrote: Tue Aug 24, 2021 6:52 am
aray wrote: Mon Aug 23, 2021 9:15 pm And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.
Heads up...from other discussions, I think this may require another (4th) account because this money must be accounted for separately from ordinary Roth 401k (which results from Roth 401k contributions).
I agree with this, in a MegaCorp plan I am very familiar with, they forever account it as "Roth from Aftertax"... To do plan administration well. One might need quite a few accounts depending on all the inputs/output to/from the plan.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

Not to mention....an account for employer contributions. And rollover contributions.

All of these different accounts have different rules and somehow the accounting is separate for each one. I can't offer any help on how it is done, but it might be something you want to know about before going down this road.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

Interesting, I had not anticipated that even more separate accounts may be necessary. Thank you for putting this concept on my radar.

However, in researching on this IRS page:
https://www.irs.gov/retirement-plans/pl ... #rollovers
... the IRS states "Designated Roth accounts can't be set up solely to accept in-plan rollovers - they must also accept elective deferrals from participants."

Based on that, it seems the IRS has given its blessing on commingling Roth elective deferrals with in-plan Roth rollover funds and appears the IRS is actively discouraging the set-up of a separate rollover account; or am I misunderstanding something?

It's confusing because in the plan document it does talk about separate accounting for the rollover money. Perhaps if I'm just internally keeping track of what amount entered the Roth account as elective deferrals vs. the amount that entered the Roth account as rollover funds, I'm considered to have kept proper track (and perhaps keeping track of gains / losses in a Roth account that contains both deferrals and rollover money might boil down to a simple pro-rata calculation based on % of overall contributions that came from deferrals vs. from rollover money)? There is not a definition provided of "Account" or "Subaccount" in the plan document.
fyre4ce
Posts: 2538
Joined: Sun Aug 06, 2017 11:29 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by fyre4ce »

retiredjg wrote: Tue Aug 24, 2021 6:52 am
aray wrote: Mon Aug 23, 2021 9:15 pm And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.
Heads up...from other discussions, I think this may require another (4th) account because this money must be accounted for separately from ordinary Roth 401k (which results from Roth 401k contributions).
Why 4 accounts? Are you saying that employee and employer pre-tax contributions must be kept separate? That's not how my account is set up... there is just one pre-tax account and both go in there. I hope that isn't a problem...
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by Soon2BXProgrammer »

fyre4ce wrote: Tue Aug 24, 2021 10:05 am
retiredjg wrote: Tue Aug 24, 2021 6:52 am
aray wrote: Mon Aug 23, 2021 9:15 pm And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.
Heads up...from other discussions, I think this may require another (4th) account because this money must be accounted for separately from ordinary Roth 401k (which results from Roth 401k contributions).
Why 4 accounts? Are you saying that employee and employer pre-tax contributions must be kept separate? That's not how my account is set up... there is just one pre-tax account and both go in there. I hope that isn't a problem...
An example: Accounts and accounting are two different things... if the plan allows loans but only from employee contributions (and growth) but not employER funds, then you need to be able to prove the accounting.

One way to help do accounting is to have different accounts..
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

aray wrote: Tue Aug 24, 2021 9:59 am Interesting, I had not anticipated that even more separate accounts may be necessary. Thank you for putting this concept on my radar.

However, in researching on this IRS page:
https://www.irs.gov/retirement-plans/pl ... #rollovers
... the IRS states "Designated Roth accounts can't be set up solely to accept in-plan rollovers - they must also accept elective deferrals from participants."

Based on that, it seems the IRS has given its blessing on commingling Roth elective deferrals with in-plan Roth rollover funds and appears the IRS is actively discouraging the set-up of a separate rollover account; or am I misunderstanding something?

It's confusing because in the plan document it does talk about separate accounting for the rollover money. Perhaps if I'm just internally keeping track of what amount entered the Roth account as elective deferrals vs. the amount that entered the Roth account as rollover funds, I'm considered to have kept proper track (and perhaps keeping track of gains / losses in a Roth account that contains both deferrals and rollover money might boil down to a simple pro-rata calculation based on % of overall contributions that came from deferrals vs. from rollover money)? There is not a definition provided of "Account" or "Subaccount" in the plan document.
I do not know if it requires a separate account or simply separate accounting.

What I do know is that elective deferral contributions to Roth 401k fall under a different set of rules than Roth 401k that arises from in-plan-Roth rollovers. It would be easy to keep up with the dollar amount of contributions but how would you know what part of the earnings belongs to one side vs the other side? It might be somewhat easy to pro-rate with one time contributions or rollovers, but what about contributions every 2 weeks and rollovers every 4 weeks? Most people would find it easier to simply have separate accounts.

I do not know what is required and how these things are done. I'm only pointing out things that you need to know or think about ahead of time.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

fyre4ce wrote: Tue Aug 24, 2021 10:05 am
retiredjg wrote: Tue Aug 24, 2021 6:52 am
aray wrote: Mon Aug 23, 2021 9:15 pm And Brad definitely confirmed with his team or someone else as well that it will be possible to do in plan Roth rollovers from that new 3rd account to the Roth 401k account.
Heads up...from other discussions, I think this may require another (4th) account because this money must be accounted for separately from ordinary Roth 401k (which results from Roth 401k contributions).
Why 4 accounts? Are you saying that employee and employer pre-tax contributions must be kept separate? That's not how my account is set up... there is just one pre-tax account and both go in there. I hope that isn't a problem...
I'm saying that what the law allows one to do with the employee elective deferrals is different from what can be done with employer pre-tax contributions - so it seems that there must be some kind of separate account or at least separate accounting.

Well, actually I don't know that is true in your solo 401k...or even Solo 401ks in general, but it is true about employer sponsored 401k plans. I suppose that may not carry over to Solo plans - I don't know.
SuzBanyan
Posts: 2008
Joined: Thu Jun 02, 2016 11:20 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by SuzBanyan »

retiredjg wrote: Tue Aug 24, 2021 10:57 am
aray wrote: Tue Aug 24, 2021 9:59 am Interesting, I had not anticipated that even more separate accounts may be necessary. Thank you for putting this concept on my radar.

However, in researching on this IRS page:
https://www.irs.gov/retirement-plans/pl ... #rollovers
... the IRS states "Designated Roth accounts can't be set up solely to accept in-plan rollovers - they must also accept elective deferrals from participants."

Based on that, it seems the IRS has given its blessing on commingling Roth elective deferrals with in-plan Roth rollover funds and appears the IRS is actively discouraging the set-up of a separate rollover account; or am I misunderstanding something?

It's confusing because in the plan document it does talk about separate accounting for the rollover money. Perhaps if I'm just internally keeping track of what amount entered the Roth account as elective deferrals vs. the amount that entered the Roth account as rollover funds, I'm considered to have kept proper track (and perhaps keeping track of gains / losses in a Roth account that contains both deferrals and rollover money might boil down to a simple pro-rata calculation based on % of overall contributions that came from deferrals vs. from rollover money)? There is not a definition provided of "Account" or "Subaccount" in the plan document.
I do not know if it requires a separate account or simply separate accounting.

What I do know is that elective deferral contributions to Roth 401k fall under a different set of rules than Roth 401k that arises from in-plan-Roth rollovers. It would be easy to keep up with the dollar amount of contributions but how would you know what part of the earnings belongs to one side vs the other side? It might be somewhat easy to pro-rate with one time contributions or rollovers, but what about contributions every 2 weeks and rollovers every 4 weeks? Most people would find it easier to simply have separate accounts.

I do not know what is required and how these things are done. I'm only pointing out things that you need to know or think about ahead of time.
I would guess that the issue with contributions/rollovers every couple of weeks is really only an issue for those who receive a salary from a single owner corporation. For sole proprietors and single member LLC, the better practice will usually be to not make contributions until completing the accounting for the tax year.

But your comment makes it clear how important is is to Keep It Simple when the there is no TPA. If every “sub account” is invested the same, accounting will be much easier.
User avatar
retiredjg
Posts: 53990
Joined: Thu Jan 10, 2008 11:56 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by retiredjg »

I guess the other message... :happy ....is to use a TPA if you want to do Solo 401k with mega-backdoor. :happy
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by arsenalfan »

I thought this discussion of Employee Fiduciary might be helpful - sorry if cross-contaminating the conversation.

I also am interested in pursuing a megabackdoor Roth and getting the $58k limit (<50yo) all into Roth.
Topic Author
aray
Posts: 40
Joined: Mon Dec 18, 2017 9:04 am

Re: After Tax Contributions / Mega Backdoor Roth - Etrade Solo 401k

Post by aray »

As an update, I've consulted with a CPA who has 10+ years experience, who has advised me of the following:
  • The after tax (non Roth) contributions can be made directly to the traditional 401k account. I can then immediately do the in plan Roth rollover to move these funds to the Roth 401k account. A separate account can be used for the after-tax (non Roth) contributions, but that's not required. If I'd prefer to open a 3rd account to exclusively hold the after tax contributions, the CPA says this will also be fine and it's up to me.
  • For the Roth 401k account, I don't need separate accounts for Roth 401k elective deferral contributions and amounts rolled over or converted to the Roth 401k. These amounts can be commingled.
  • 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 (using 2020 1040 as an example): on line 5a would report the gross amount rolled over and on line 5b would report the taxable amount, and if there's no taxable amount then line 5b will show zero
  • As it's a solo 401k, no ACP testing would be needed with after tax contributions
  • The CPA advises that I need to keep track of contributions to the Roth 401k account in terms of elective salary deferral amounts and rollover amounts, but once funds are in the Roth 401k, the CPA doesn't see any need or benefit to keeping track of the earnings in the Roth account (as far as what amount of earnings are attributable to elective salary deferrals vs. attributable to rollover funds). Eventually when distributions are made from the Roth 401k account, the first distributions are considered a return of the contributions, and then after contributions are used up any remaining distributions are considered earnings. Whether the earnings are from Roth contributions or after tax contributions rolled over to the Roth account (earnings while in the Roth account), will not matter, I've been told.
Post Reply