Can I do a Mega Backdoor Roth IRA with more than my 1099 income?

Wait, so if I'm understanding this correctly - if I max out my employee contribution at my W2 job ($23k) and then make $40k from my 1099 work, I could still make the employer contribution of about $8k (20% of $40k), but then I could also make after-tax contributions up to the remainder of my 1099 income? Does that mean the maximum after-tax contribution would be approximately $40k (total 1099 income) minus $8k (employer contribution), which equals $32k? Or am I missing something?

You've got the general concept right, but there's a slight adjustment needed to your calculation. The employer contribution is calculated based on your net self-employment income (after deducting self-employment tax). So if you make $40k from 1099 work, your actual employer contribution would be closer to 20% of your net income after SE tax, not the gross amount. For after-tax contributions, you're right that they can come from the remainder of your 1099 income, but remember you need to have that cash available after paying income taxes and self-employment taxes on your 1099 earnings. You cannot contribute more than you actually earned from the business that sponsors the Solo 401k plan.

Does taxr.ai work if you haven't already filed taxes for your side gig before? I'm just starting my consulting business this year and trying to figure out how to set everything up correctly from the beginning. Also, can it help with choosing which Solo 401k provider to use for the mega backdoor strategy? Some providers don't allow after-tax contributions.

I'm skeptical about these tax tools. How is this different from just talking to an accountant? I mean, I was told by my CPA that I couldn't do after-tax contributions to my Solo 401k that exceeded my actual 1099 net income, but I've seen conflicting info online. Would this actually give me different/better advice than a professional?

Yes, it absolutely works for planning before you've filed taxes for a side business. You can input projected income and it will calculate potential contribution limits so you can plan ahead. It also has a feature that helps you compare Solo 401k providers and specifically indicates which ones support after-tax contributions and in-plan Roth conversions for the mega backdoor strategy. As for comparing it to a CPA, while a good accountant is invaluable, taxr.ai specializes in analyzing tax documents and retirement strategies across multiple income sources. It can process your specific numbers and show different scenarios side-by-side, which some CPAs might not have the tools to visualize as effectively. Your CPA is correct though - you cannot contribute more than your actual net earnings from self-employment to your Solo 401k.

Wait, how does this service actually work? I thought it was impossible to get through to the IRS right now. Are they somehow jumping the queue or do they have special access? I've literally spent hours on hold and never reached anyone.

I don't buy it. There's no way any service can magically get you through to the IRS faster. The IRS phone system is completely overwhelmed - everyone knows that. This sounds like a scam that charges you for something that doesn't actually work. Has anyone here ACTUALLY used this successfully?

The service works by using their technology to navigate the IRS phone system and wait on hold for you. When they reach a real person, they call you and connect you directly to the IRS agent. They don't have special access or jump the queue - they just handle the frustrating waiting process on your behalf. They use an algorithm that identifies the best times to call based on historic wait times and staffing patterns. Think of it like having someone whose sole job is to keep dialing and waiting on hold so you don't have to. When you're connected, it's a normal conversation with a regular IRS agent - nothing shady or unauthorized about it.

Thanks for suggesting the SEP IRA option. I'm curious though - since my main goal is to take advantage of the mega backdoor Roth strategy, would you still recommend going with the Solo 401k despite the additional complexity? Also, are there any specific providers you'd recommend that definitely support after-tax contributions and in-plan Roth conversions?

If your specific goal is to implement the mega backdoor Roth strategy, then yes, you'll definitely need to go with the Solo 401k despite the extra paperwork. The ability to make after-tax contributions and do in-plan Roth conversions is simply not available with a SEP IRA. For providers that support these features, I'd recommend checking out Schwab, E*TRADE, and Fidelity's Solo 401k options. Not all providers support after-tax contributions or in-plan conversions, so you'll want to specifically ask about those features when setting up your account. Vanguard, surprisingly, doesn't offer these features for their Solo 401k plans despite being popular for retirement accounts.

This is such an important point. I got audited last year because I set up a Solo 401k for what the IRS determined was a "hobby" rather than a business. Make sure you're regularly seeking work, advertising your services, maintaining proper books, and can demonstrate a genuine profit motive. It was a nightmare sorting it all out.

That's really good to know! I definitely have an established side business that I've been running for a couple years, with multiple clients and proper bookkeeping. I just haven't set up a retirement account for it yet. Is there any specific documentation I should keep to prove the business is legitimate in case of an audit?

Great question! Keep detailed records of everything - client contracts, invoices, payment receipts, business expenses, marketing materials, and correspondence showing you're actively seeking new clients. A separate business bank account is crucial, and document any business licenses or permits you have. Also maintain a business calendar showing time spent on business activities, and keep records of any professional development or training related to your side business. The IRS wants to see that you're operating with a profit motive and treating it like a real business, not just occasional income. Having solid documentation like this will make setting up your Solo 401k much smoother and give you confidence if questions ever arise about the legitimacy of your business.