Solo 401k After Tax Contributions Explained in Detail

Solo 401k after-tax contributions can be a powerful way to boost your retirement savings, allowing you to contribute up to $57,000 in a single year.

This is a significant increase from the $19,500 annual limit on traditional 401k contributions.

Retirement plans can be complex and overwhelming, but understanding the basics can help you make informed decisions about your solo 401(k) after-tax contributions.

A one-participant 401(k) plan, also known as a Solo 401(k), is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.

You can contribute to your Solo 401(k) in both capacities: as an employee and as an employer. This allows you to make the most of your after-tax contributions.

If you have a lot of self-employment income, consider a personal defined benefit/cash balance plan. Contribution limits to these plans are actuarially determined and can be six figures or more.

Here are some options to get help with retirement accounts like Solo 401(k)s:

To make a mega backdoor contribution to a Roth account, follow these two steps:

Convert the voluntary contributions to Roth.

Keep in mind that any earnings on the voluntary contributions must be included in your taxable income in the year of conversion.

Contributions to a solo 401(k) plan are subject to certain limits. The annual contribution limit for elective deferrals is $23,000 for 2024, and up to $69,000 for 2024, including employer nonelective contributions.

You must consider the limit for all elective deferrals you make during a year, not just the plan you're contributing to. For example, if you're employed by a second company and participating in its 401(k) plan, your limits on elective deferrals are by person, not by plan.

The total contributions to a participant's account, not counting catch-up contributions for those age 50 and over, cannot exceed $69,000 for 2024.

Here are the standard contribution limits for a solo 401(k) plan:

To make a mega backdoor Roth contribution, you can make after-tax contributions to a 401(k) account up to the 415 limit, which is $77,500 if catch-up eligible, or $70,000 otherwise for 2025.

You might be thinking, "If I can contribute up to 25% of my compensation toward the pre-tax portion of the plan, that sounds like a great deal." It is, but there's a catch.

You can contribute up to 25% of your compensation toward the pre-tax portion of the plan.

This can provide a valuable tax deduction in the year they are made, reducing your taxable income.

These profit-sharing contributions grow tax-deferred, not tax-free like the after-tax Roth contributions.

That means they will be subject to taxes when withdrawn during retirement.

A solo 401(k) plan is a great option for self-employed individuals, but it's not the only choice. You can also consider alternatives like SEP-IRAs or other types of plans.

A SEP-IRA, for example, is a simpler option with less paperwork and can be funded more quickly. However, it may not offer the same level of contribution flexibility as a solo 401(k).

Here are some alternatives to a one-participant 401(k) plan:

The solo 401(k) is often a better choice due to its ability to make employee contributions, which can be a larger contribution than a SEP-IRA. This is especially important for high-income professionals who may be doing Backdoor Roth IRAs each year.

A one-participant 401(k) plan isn't a new type of 401(k) plan, it's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

You can consider a personal defined benefit/cash balance plan if you have a lot of self-employment income and wish to save even more of it in a tax-deferred account. Contribution limits to these plans are actuarially determined, and they can be six figures, even more than $200,000 per year.

If you're looking for a fully customized solo 401(k), you can consider companies like Emparion, which offers a high level of service and can grow with your business. These companies include Emparion, CarsonAllaria Wealth Management, iQ401K (FPL Asset Management), Wellington Retirement Solutions, Litovsky Asset Management, and more.

Some companies that offer fully customized solo 401(k)s include:

You can also consider using companies that specialize in setting up 401(k)s for practices, which generally charge more but offer a higher level of service.

If you're considering a one-participant 401(k) plan but aren't sure it's the best fit, there are alternative options to explore.

SEP plans are a viable alternative, offering some of the same benefits as a one-participant 401(k) plan.

If you're not eligible for a SEP plan, you can also consider an IRA or Roth IRA, which can be a great option for self-employed individuals or small business owners.

Other types of plans, such as those listed in the article, are also worth considering.

Here are some alternative options to a one-participant 401(k) plan:

A solo 401(k) is often a better choice than a SEP-IRA for self-employed individuals due to its higher contribution limits. The solo 401(k) allows for employee contributions, including a $22,500 employee deferral contribution, making it possible to make a larger contribution.

SEP-IRAs, on the other hand, are simpler and require less paperwork, making them a good option for those who value ease of use. However, SEP-IRAs count towards the pro-rata calculation associated with the Backdoor Roth IRA process, whereas solo 401(k)s do not.

The Secure Act 2.0 has made it possible to make Roth contributions to SEP-IRAs, which won't count towards the Backdoor Roth IRA pro-rata calculation. However, solo 401(k)s are still the default retirement account for the self-employed due to their higher contribution limits.

Here's a comparison of the two options:

Ultimately, the decision between a solo 401(k) and a SEP-IRA depends on your individual needs and priorities. If you value higher contribution limits and don't mind the extra paperwork, a solo 401(k) may be the better choice. If you prefer a simpler option, a SEP-IRA may be the way to go.

Vanguard is a popular choice for solo 401(k) plans. It's a mutually owned mutual fund company that focuses on low costs.

One of the benefits of using Vanguard for your solo 401(k) is that you can see and invest in your 401(k) from the same login as your other Vanguard accounts, such as your Roth IRA or taxable brokerage account. This can simplify your financial management.

Vanguard's solo 401(k) plan no longer requires you to use the higher cost "Investor" shares, making it a more affordable option. This change is a welcome improvement for those looking to save on costs.

Years ago, Vanguard's solo 401(k) plan did not allow for IRA rollovers into the plan, but that's no longer the case. This expanded flexibility is a big plus for those looking to consolidate their retirement accounts.

The standard Vanguard solo 401(k) plan allows Roth contributions, which can be a great way to save for retirement on a tax-free basis.

If you're considering a solo 401(k), you have several retirement account options to consider. A one-participant 401(k) plan, also known as a solo 401(k), is essentially a traditional 401(k) plan covering a business owner with no employees, or that person and their spouse.

You can have multiple 401(k)s, with many doctors qualifying to use two 401(k)s, and even three or more in rare cases. The total employee contribution limit to all 401(k)s and 403(b)s is $22,500 ($30,000 for 50+), which can be split between the accounts in any way you choose.

To maximize employer matching dollars, using multiple 401(k)s can be beneficial. Each 401(k) from an unrelated employer has its own maximum contribution amount of $66,000, made up of four types of contributions: employee tax-deferred, employee tax-free, employee after-tax, and employer contributions.

If you're a high-income doctor with a lot of self-employment income, consider a personal defined benefit/cash balance plan, which has higher contribution limits, often six figures. However, these plans are more complex and have higher fees.

If you find all of this overwhelming, consider hiring a professional to help you set up a solo 401(k) or other retirement account. Many firms offer assistance, and it's easier than it initially seems to get started.

To open a brokerage account, you'll need to choose a reputable online broker that meets your needs. Some popular options include Fidelity, Vanguard, and Charles Schwab.

Brokerage accounts can be funded with after-tax dollars, allowing you to contribute more money than you would to a traditional 401(k) plan.

If you're looking to supplement your solo 401(k) with other retirement accounts, consider SEP or IRA/Roth IRA options.

SEP plans are a viable alternative to solo 401(k) plans, and can be a good option for those who want to save more for retirement.

You can also consider other types of plans, which can provide additional benefits and flexibility.

If you have multiple income sources, you may be able to qualify for multiple 401(k)s, but be aware that the total employee contribution limit is $22,500 ($30,000 for 50+).

Each 401(k) from an unrelated employer has its own maximum contribution amount of $66,000, which can be made up of four types of contributions:

If you're looking for an even more tax-efficient option, consider a personal defined benefit/cash balance plan, especially if you have a high income and are in your 50s or 60s.

A mega backdoor contribution is a powerful strategy for solo 401(k) plans, allowing business owners to make after-tax contributions up to $77,500 (or $70,000 if not catch-up eligible) in a single year.

This two-step process is relatively straightforward: first, make after-tax contributions to a 401(k) account, and then convert those voluntary contributions to a Roth account.

Any earnings on the voluntary contributions will be included in your taxable income in the year of conversion, but future earnings will be tax-free if part of a qualified distribution.

Solo 401(k) plans offer a unique advantage here: since participation is limited to business owners, there's no risk of contribution refunds due to the Actual Contribution Percentage (ACP) test.

To make a mega backdoor contribution, you'll need to follow these steps:

Convert the voluntary contributions to Roth.

Keep in mind that Roth 401(k) accounts and IRAs have different pros and cons, so it's essential to weigh your options carefully when choosing the best approach for converting voluntary contributions to Roth.