Ian Berger, JD
IRA Analyst

In the August 16, 2021 Slott Report, we showed that someone participating in a 401(k) plan through a “regular” job could also establish a solo 401(k) plan through a side job and potentially contribute up to $58,000 this year in after-tax contributions to the solo plan. However, this only works if the company sponsoring the regular 401(k) plan and the entity sponsoring the solo 401(k) (e.g., a sole proprietor) are considered unrelated under IRS rules.

The reason this strategy is so appealing is that it allows you to immediately convert those after-tax contributions to a Roth IRA through the “Mega Backdoor Roth.” That way, you could fund a Roth IRA with amounts far in excess of the $6,000 (or $7,000 if age 50 or older) limit on annual Roth IRA contributions. Even better, the conversion would be virtually tax-free. The distribution of the after-tax contributions are non-taxable. Although the earnings are taxable, you could defer taxation by rolling them over a traditional IRA.

Bear in mind that a few conditions must be met for the Mega Backdoor Roth strategy to work:

1. The solo 401(k) plan must allow after-tax contributions.

2. The plan must also allow in-service distributions of after-tax contributions.

3. You would need to be able to afford to contribute the after-tax contributions.

Example: Erin has a regular job with Global Industries that sponsors a 401(k) plan and has recently established a solo 401(k) through a sole proprietorship. Global and Erin’s sole proprietorship are not considered related entities. Erin makes sure that her solo 401(k) offers after-tax contributions and permits in-service withdrawals of those contributions. Erin’s sole proprietorship is extremely profitable in 2021, allowing her to contribute $58,000 in after-tax contributions to the solo plan. Erin wants to take advantage of the Mega Backdoor Roth, so she takes a distribution of her after-tax account (consisting of $58,000 of contributions and $2,000 of earnings). She converts the $58,000 tax-free to a Roth IRA and rolls over the $2,000 to a traditional IRA.

Many regular (non-solo) 401(k) plans – especially those sponsored by small and medium-sized companies – do not offer after-tax contributions. That’s because those contributions are subject to an IRS “nondiscrimination” test. That rule prohibits after-tax contributions for higher-paid employees unless lower-paid employees make a certain level of contributions. Since high-paid employees are most likely to have the funds to contribute, that test is often impossible to pass. Without after-tax contributions, the Mega Backdoor Roth strategy doesn’t work. But solo 401(k)s are exempt from the nondiscrimation rule, so there’s no problem with permitting after-tax contributions in solo plans.

Ready To Take



For more information about any of our products and services, schedule a meeting today.

Or give us a call at (803) 242-1050

Investment advisory services offered through Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. Nothing on this website constitutes investment, legal or tax advice, nor that any performance data or any recommendation that any particular security, portfolio of securities, transaction, investment or planning strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations, execution of required documentation, and receipt of required disclosures. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to and search by our firm name or by our CRD #175083.

 ADV Part 2A & Form CRS              Privacy Policy