We’ve got $2 million in pre-tax retirement funds already – do I need a Solo 401(k) that allows after-tax mega backdoor conversions?

Many savers are drawn to traditional IRAs and 401(k)s because they offer a tax break on contributions. But in return, people who use these plans face taxes on withdrawals during retirement, not to mention required minimum distributions (RMDs).

Roth accounts, on the other hand, don’t give you an immediate tax break on the money you put in. But investment gains in a Roth IRA or 401(k) are tax-free, and withdrawals are not taxable either.

Plus, Roth IRAs and 401(k)s do not force savers to take RMDs. This gives you more flexibility with your money when you’re older.

It’s a good idea to diversify into a Roth account from a tax perspective if you don’t have Roth savings already. And in this Reddit post, we have someone who’s wondering what account to use for Roth savings purposes.

They’re interested in opening a solo 401(k), but they’re not sure it’s the right move since they’re looking to put money into a Roth account. Here’s what they should do.

Look carefully at each plan’s features

Some solo 401(k)s have a Roth savings feature you can contribute to on an after-tax basis off the bat. And some solo 401(k)s allow you to do an in-plan conversion to a Roth if your money isn’t in a Roth already.

So the poster’s best bet may be to simply find a solo 401(k) that allows them to do what they want as far as Roth funds go. The benefit of a solo 401(k) is that it offers generous contribution limits. The poster, based on their age, can contribute up to $70,000 to a solo 401(k) this year.

That said, there can be fees associated with a solo 401(k). So it’s important to look at those, as well as the investments each plan offers.

But all told, there’s a good chance the poster can find a solo 401(k) that will allow them to do an after-tax mega-back door conversion. So it’s worth looking into.

Get advice from a professional

The poster here is in great financial shape. They have a nice chunk of money saved for their age, and it’s clear that they still anticipate earning a large income.  But it’s still a good idea for the poster to consult a financial advisor for guidance on finding the right home for their long-term savings.

Just as it’s important to have diversification in the context of your investments, it’s important to have diversification from a tax perspective. A financial advisor can help set the poster up with the right accounts so they’re getting all of the benefits they want.

Plus, it’s never a bad idea to have a professional do a portfolio check-up. The poster has plenty of time to make adjustments to their investment strategy ahead of retirement if need be.

They may or may not need to. But it’s ideal to have an advisor take a closer look. If anything, it might give the poster, or anyone in a similar boat, more peace of mind as retirement slowly but surely gets closer.

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