Self 401(k) Inquiry
I’m currently a W2 employee but will also have some 1099 income in 2025. I max out my 401(k) at my W2 job, but I don’t receive any employer contributions.
I’ve learned that I can set up a self-directed 401(k) for my 1099 income, allowing me to make an employer contribution that’s 20% of my gross earnings. For instance, if I earn $30,000, I can contribute $6,000 to my self 401(k) pre-tax as an employer contribution.
If I establish a self 401(k) plan that permits after-tax contributions and in-plan conversions, can I utilize the megabackdoor Roth strategy? For example, if I net $12,000 after taxes from my 1099 income of $24,000, am I restricted to contributing only $12,000 in after-tax contributions, or can I contribute a higher amount?
One response
You’re on the right track with your understanding of a solo 401(k) and potential megabackdoor Roth contributions. To clarify a few points:
Employer Contributions: Since you’re self-employed for the 1099 income, you can make contributions as both an employee and employer. As an employee contribution, you can contribute up to $22,500 for 2025 (or $30,000 if you’re age 50 or older). The employer contribution can be 25% of your net earnings from self-employment (which is after deducting half of your self-employment tax and other business expenses).
After-Tax Contributions: If your solo 401(k) allows for after-tax contributions, you can contribute up to the overall limit of $66,000 for 2025 (or $73,500 if you’re age 50 or older) combining both employee and employer contributions. This total includes all contributions—employee contributions, employer contributions, and after-tax contributions.
Megabackdoor Roth Strategy: For the megabackdoor Roth to work, you can make after-tax contributions up until you hit the overall limit mentioned above. So, in your scenario, if you have a net income of $12,000 from your 1099, you can contribute that amount as after-tax, but you may also be able to contribute beyond that if your total contributions (including employee and employer contributions) do not exceed the overall limit.
To answer your last question directly: Yes, you can contribute more than the $12,000 as long as your total contributions stay within the $66,000 limit for 2025. So if the total of your employee contribution ($6,000) and employer contribution (up to $6,000 from the 30K gross) is below the limit, you can add additional after-tax contributions to fill the gap.
Always consult with a tax professional or financial advisor to ensure you’re following the rules correctly and maximizing your retirement savings effectively.