Can a Sole Proprietor have a Cost Basis in his own (Traditional) Solo 401 K?

[Gary39]

Can a Sole Proprietor who makes an (after tax) Profit Sharing Contribution to his own traditional Solo 401 K account, but does not claim it as a personal deduction (because he already has a zero tax liability in the current year) use it reduce the taxable amount of a future In Plan Roth Conversion (much as one could if they had made After Tax Contributions to a Traditional IRA and then later did a Conversion to a Roth IRA)?  If so, how would one report that to the IRS (e.g. for the IRA analogy you would use Form 8606).  Any thoughts or guidance would be appreciated.

[MaryK4]

An after tax contribution to a 401k is a Roth 401k contribution so you cannot make nondeductible contributions and later convert to a Roth 401K.  Your contribution to a Solo401k is your net business income.  The rules for Self-Employment retirement plans are not necessarily analogous to IRAs.  See Retirement Plans for Self-Employed People. 

[Gary39]

Thanks MaryK4, but I am not sure that is always correct (in all situations)?  In this specific case the Sole Proprietor already made the maximum allowable Salary Deferral Contributions to the Roth 401 K before making other After Tax Profit Sharing Contributions to the Traditional 401 K (and in 2022 Profit Sharing Contributions could only be made to the Traditional 401 K  -- although SECURE 2.0 now allows Profit Sharing Contributions to Roth 401 K for 2023 and beyond - at least for those 401 K plans that incorporate these new rules).  So (as I understand it) those After Tax Profit Sharing Contributions can't be deducted as Business Expenses (because they are for the benefit of the Business Owner) and they are of no value to the Owner as a Personal Deductions (because his tax liability is already zero).  So I was just wondering if there is some way for him to count them as Cost Basis in the Traditional 401 K (and benefit from that in the future if/when he does In Plan Roth Conversions, as he expects to do)?   Not sure that I quite understand the comment that "you cannot make nondeductible contributions and later convert to a Roth 401K".  I think you could if (for example) you had made Salary Deferral Contributions to a Traditional 401 K (perhaps in excess of the Annual Maximum for Roth Contributions), and your 401 K Plan allowed In Plan Roth Conversions (but that is not really the question here).  The question here is regarding Sole Proprietor's After Tax Profit Sharing Contributions to the Traditional 401 K, which can later be transferred into the Roth 401 K via an In Plan Roth Conversion (which the plan allows - although it is a taxable event).   If there was no Business Deduction for the After Tax Profit Sharing Contribution (since it was for the Sole Proprietor) and no Personal Deduction for it either (since the Sole Proprietor already had a zero tax liability for 2022) can it be used to reduce the taxable amount of the future In Plan Roth Conversion?  A fairly specific question I realize, and the short answer may just be "no" -- because (as you say) Self Employed 401Ks and IRA are not necessarily analogous.  

[dmertz]

@Gary39 , you are correct that MaryK4,'s answer is incorrect.

The term "cost basis" is generally not used when referring to 401(k) plans.  The term "after-tax" basis is used instead.

As long as your regular contributions do not already result in reaching the maximum annual additions limit, you can make after-tax contributions to your Solo 401(k) if the plan agreement permits such contributions.  The after-tax contributions and attributable gain or loss should be tracked in a separate sub-account within your traditional 401(k).

[Gary39]

Thanks, that is helpful.  I also subsequently realized that the situation I described is actually an application of the Mega Back Door Roth strategy (although a very small one in this case) - although I had not thought of it that way.  And the link below provides further guidance on that (for anyone who might be interested).  The trick will be working with the Solo 401 K Plan Administrator to property track the After Tax Money (i.e. the Profit Sharing Contributions made by the Sole Proprietor which were not claimed as Personal Deductions) in the Tradition 401 K Account, or alternately to correct this on the 1099-R which they issue for the subsequent Roth Conversion (if they fail to do so).  The SECURE Act 2.0 also now allows Profit Sharing Contributions directly to the the Roth 401 K Account (beginning in 2023) so hopefully this will all be mute soon (i.e. after the Solo 401 K Plan Rules are modified accordingly). https://thefinancebuff.com/mega-backdoor-roth-in-turbotax.html#htoc-a