Mega back door with multiple 401k

[Mike S.]

Regarding the non deductible amount that you can contribute to a 401k, is the amount limited by your earned income in the sponsoring business or the total of your earned income? Lets say that you earn 100k in business A and 10k in business B. Business A 401k does not allow non deductible contribution while business B 401k allow supplemental non deductible contributions. The total of your contributions can not exceed $19,500 pre tax or ROTH, and the total of your non deductible contribution can not exceed $37,000. And the total of both can not be above your earned income. I understand that the pre-tax or ROTH contribution in each 401k can not be higher than the earned income in each business. So the pre-tax or ROTH contribution in 401k B could not be higher than $10,000 in that example. However what is the requirement for supplemental non-deductible contributions? Does the earned income limit is also independently assessed per sponsoring business? Could one contribute the $37,000 in 401k B?

[Adam Bergman]

Hi - in general, employee deferrals are per individual and employer contributions are per business. In the case of after-tax contributions, they must be allowed by the plan document and are subject to the actual contribution percentage (ACP) test and the IRC 415 limits. In other words, after-tax contributions are not treated as employee deferrals or employer contributions (subject to IRC 402 & 404 limits) but are subject to the ACP test. Once satisfied, you can make the after-tax contribtuions and convert to Roth. In addition, if the businesses are part of a controlled group - you own more than 80% of the both companies - and both businesses are Schedule C businesses, then you may be able to use the net self-employment from both businesses to determine your earned income for contribution purposes. However - both plans would have to have the same features and benefits and you would not be able to exceed the IRC 415 limit - $57,000 or $63,500 if over 50 for 2020, plus would have to satisfy the ACP test in the case of after-tax contributions.  Note - if you have no full-time employees you will not have any ACP issues.  Hope this helps.

Adam Bergman
IRA Financial