401K Roth conversion .... Solo option

[Tony Hightower]

I currently have a 401k with my employer with a mid 100's balance. I also have the ability, self employment, to open a solo401k with the intention of eventually rolling over my employer balance if I retire or forced to leave.

I also have the option of making my 401k a Roth. Roth was not available when account was started. I have not changed it because of the large tax hit I would take, considering my family income and thought I could convert in 4-5 years when wife retires(less income), I would still have 10 or so working years.

Question is, with the change in tax rate should I just go ahead and Convert this in 2018? Not sure If I can do partial conversion and plan over a few years to save some on tax hit.(Fidelity 401k?) . But I do believe I can immediately change my contributions to Roth.

2nd Question, When in a Roth 401k are my employer matched contributions taxed to me?

I know there are lots of other things that may go into it. And if I open a Solo401k this year(18) I will only be able to put in 4-5k.

Just wanting to be prepared for fast movement when needed.

Thanks

T

[Dmitriy Fomichenko]

Tony,

Regarding your Roth conversion question - to get an accurate answer you need to talk to your CPA who understands your tax situation (current and future) and can properly advise you. The bottom line is you need a tax advice, which is beyond public forum.

You can change your contributions to Roth, generally speaking Roth would be beneficial the more time you have for the funds to be invested in tax-free environment, potential return on investment, and few other factors.

Generally, the contributions made by the employer are not taxed to you now, but will be taxable when you take out distribution. But if your plan allows, you may have the ability to do a Roth conversion of your employer contributions. The amount of conversion will be taxable event in the year of conversion, but from that point on can grow tax free for the rest of your life.

Contributions to a Solo 401k are based on your earned self-employment income. You can contribute up to $60,000 for 2017 ($1K more for 2018) and can never be more than what you earn. 

[Tony Hightower]

Thanks for quick reply Dmitriy.

Okay, so even in a Roth the full amount of growth is not tax free. I will still have to pay on the gains of my employer match?

I thought on a solo401k I could only put in a percentage of earnings. I can put 100% up to limit?

Tony

[Brian Eastman]

@Tony Hightower

Your elective contributions to the 401(k) can be made on a Roth basis.

The employer match will generally be made on a tax-deferred basis.

You as the employee should be able to come along after the fact and elect to convert any vested employer contributions to Roth status.

I agree that this type of tax-strategy matter should be discussed with your licensed tax advisor who is looking at your big picture.

[Dmitriy Fomichenko]

Tony, all of the growth of the Roth account IS tax free. 

Employer match is NOT your Roth contributions, it is an employer match. And as I said earlier you can elect to convert that into Roth if you desire and plan rules allow. Once you convert your employer contributions to Roth, it becomes Roth and will be tax free from that point on.

[Vlad K.]

@Tony Hightower It sounds like you have a regular 401k with your employer with an option to convert to Roth 401k, correct?

Few things that hopefully answer your questions without too much details:

- You can have SEP IRA (could be your best bet), which is similar to SEP 401k in addition to your 401k at your employer,

 - Your employer's match would become taxable upon conversion to Roth 401k,

 - You can do partial conversion (unless your plan administrator allows only one type of account,

 - Any conversion will be a taxable even for you, full or partial, and could move you into a higher tax bracket and be taxed at rates higher than your normal rate would be. So, if you convert your $150k during 2018, your taxable income will increase by more than $150k if you itemize (due to potential phase-out of itemized deductions).

Hope this helps.

Please feel free to reach out with any questions.

[Tony Hightower]

Vlad K.

Your comment about the 150k phase-out of itemized deductions also reminded me of the depreciation loss deduction. I am assuming that the Roth conversion would go toward my income for the year meaning I would have more than 150k in income and not be eligible for any depreciation deductions. 

On a separate note, I think this has been asked before. Is the cost to set up a Solo401k deductible?

[Dmitriy Fomichenko]

Tony, 

Plan sponsor pays for the setup of the plan and it is a tax deductible business expense. 

[Michael Plaks]

@Tony Hightower

You're correct that higher income in the year of Roth conversion will likely push you over the $150k limit. Your understanding of the $150k limit is incorrect.

It is not about depreciation. It is about an overall loss after all deductions, including depreciation. Those losses are gradually phased out after $100k and disappear at $150k. However, they do not really disappear, but are pushed into the future.

[George Blower]

@Tony Hightower

1. The 401k rules allow for partial in-plan Roth 401k conversion. See the following:

https://www.irs.gov/retirement-plans/designated-roth-accounts-in-plan-rollovers-to-designated-roth-accounts

2. The rules allow for participating in multiple employer 401k plans see the following:

https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-one-retirement-plan

3. If your plan is to maximize your Roth 401k contributions, and you have enough self-employment income, you could possibly contribute $54,000 of after tax funds to a solo 401k for tax year 2017 and then convert those funds to a Roth solo 401k or Roth IRA even if you made contributions to your employer's full-time employer 401k plan. This special rule (where you can contribute this much to a solo 401k while also participating in another 401k)--known as the "overall limit" only applies to the after-tax account not to the pretax account. 

4. To answer your question about matching contributions made to a full-time employer 401k plan, matching contribution can only be applied to the pretax account.