Generally, there are two ways to execute the Mega Backdoor Roth Conversion:
Voluntary after-tax contributions --> in-plan Roth conversion to Roth 401k
Voluntary after-tax contributions --> in-service distribution to Roth IRA
In-Plan Roth Conversion: After-Tax Funds to Roth
If you are implementing a backdoor Roth conversion, you might make voluntary after-tax contributions to the Solo 401k plan and then decide to convert those funds in-plan to Roth.
Generally, converting after-tax contributions to a Roth 401k is not a taxable event. That’s because you didn’t claim a deduction on the initial contribution. Therefore, the IRS does not expect any taxes on the conversion.
As with the pretax to Roth conversion filing of IRS form 1099-R, both the PAYER and RECIPIENT are the Solo 401k trust (using the Solo 401k trust name, Solo 401k trust EIN, and Solo 401k trust mailing address).
The gross distribution is the amount you are converting to Roth in-plan. However, because you are converting after-tax contributions to Roth, the taxable amount in box 2a is $0. Per IRS instructions, enter the amount as -0-.
For Box 7, enter Distribution code 7 if you are age 59.5 or older. Enter Distribution code 2 if you are under age 59.5. Distribution code 2 is for Early distribution, exception applies. This is because you are not charged the 10% early withdrawal penalty when converting funds in-plan to Roth.
In-Service Distribution: Move Money to a Roth IRA
Another strategy of the Mega Backdoor Roth conversion is to backdoor funds into a Roth IRA. Simply put, the Solo 401k account holder can make large voluntary after-tax contributions to the Solo 401k plan. Those contributions are then moved to a Roth IRA via an in-service distribution.
In this instance, the PAYER is the Solo 401k trust. Enter the Solo 401k trust name, Solo 401k trust EIN, and Solo 401k trust address on IRS form 1099-R.
For the RECIPIENT, enter your name, your address, and your social security number. You do not need to enter the Roth IRA custodian information.
Similar to the after-tax to Roth conversion, the taxable amount in box 2a is -0- as you are moving after-tax funds to another after-tax account.
Use Distribution Code H in box 7, which is for a Direct rollover of a designated Roth account distribution to a Roth IRA.
When to File
As the plan administrator, you need to furnish a copy of the form to yourself by February 1st. The IRS needs a copy by March 1st (if you file by mail) or March 31st (if you e-file, which is highly recommended).
Where and How to File
The IRS will not accept a paper filing of IRS form 1099-R. Only approved filers on the FIRE system may file the form. There are numerous helpful online services that will file the form for just a few dollars. Some resources include: