@dmertz thank you for the clarification and detailed reply, it is appreciated.
Some more questions if you don't mind:
1. On the numbers:
Actually, $18,587 is a bit off. I didn't take into account that your net earnings from self-employment plus your W-2 income would exceed the $137,700 Social Security wage base for 2020. With $100,000 of self-employment net profit and $60,000 of W-2 income, the deductible portion of self-employment taxes would be $6,157. That means that your maximum employer contribution would be 20% * ($100,000 - $6,157) = $18,769. See Chapter 5 of IRS Pub 560 for the more complete calculation that includes factors that would only affect individuals with lower net profit. This would make the maximum after-tax contribution be $57,000 - $19,500 - $18,769 = $18,731.
May I ask how you got $6157 because I may have to do the math myself (my numbers that I shared with you are simplified).
Also where does the 20% number come from? I see 25% mentioned here: https://www.irs.gov/retirement-plans/one-participant-401k-plans but they also say "For self-employed individuals, see the discussion on "Contribution limits for self-employed individuals")
By the way, chapter 5 of the IRS Pub 560 is impossible to navigate and understand. https://www.irs.gov/publications/p560
Is there a way to officially calculate this from within TurboTax? I don't want to over-contribute and incur any penalties.
2. I called eTrade (that I am opening the solo and Roth 401Ks with) today and confirmed that the plan allows:
- Allows in-Service Distributions Or Non-Hardship Withdrawals (possibly only if I open profit-sharing plan, though I am not sure what this is)
- Does NOT allow after-Tax Contributions Above and Beyond the $19,500 Pre-Tax Contribution Limits
This means that I can't make any after-tax contributions, so I imagine I will only be able to contribute:
- $19,500 for the employee deferral portion
- some amount for the max employer contribution (once I get clarity on the numbers)
- Nothing for the after-tax contributions, since my plan would not allow it.
As far as reporting, eTrade:
- does not report to the IRS/ provides 5498 tax forms for contributions made to the plan
- does not report to the IRS / provides form 5500 for benefits plan
- DOES report to the IRS and provides 1099-R for distributions made from the plan
3.
I'm not sure what you mean by a Roth-IRA conversion ladder. Partial conversions are permitted, so you can convert as much or as little as you want in any given year, allowing you to manage your marginal tax rate. However, if you make a nondeductible traditional IRA contribution and you have no other funds in traditional IRAs, you would generally want to convert the entire traditional IRA balance immediately since the conversion would be essentially nontaxable (except for possibly a small amount of taxable earnings while in the traditional IRA if the conversion does't happen immediately).
It seems like eTrade (my IRA custodian) does not allow after-tax contributions, so I may not be able to make a nondeductible traditional IRA contribution to my solo 401K.
Again, thank you.
