Getting Money from ROTH IRA to ROTH SOLO401K?

Question

Hello all,

I have been investing in both a ROTH SDIRA and a Traditional SOLO401K plan for a few years now and have things going pretty smoothly. Once I found out about SOLO401Ks, I stopped buying with my ROTH SDIRA due to the many simplifications of the SOLO401K, including easier book keeping when borrowing funds.

One things I was disappointed to find out is that I can NOT roll ROTH IRA funds over and directly into a SOLO401K plan. My ultimate goal is to get most of my retirement funds into a SOLO401K ROTH accounts for tax free rental income in retirement.

I am currently 52 years old. I have over 100K of contributions in my ROTH IRA and have had it well over 5 years. 1) Could I take say a 30K withdrawl of those 'basis funds', which my understanding is that would be tax free since it was 'post tax' money when it went in? 2) Through my self employment income make 'new contributions' of 30K INTO my SOLO401K into the "ROTH part" of it?

It *seems* logical, but that usually means there is some catch I am not seeing ;-).

As a side note, if I wanted to 'convert' some of the 'traditional funds' ALREADY in my SOLO401K over to the "ROTH part' of the SOLO401K, at what rate are the taxes figured, and can those be paid with funds from inside of the SOLO401K if I am not already retirement age, or would that be seen as an early withdrawl and taxed and penalized?

Thanks, Dan Dietz

Dmitriy Fomichenko · Answer

@Daniel Dietz,

Please keep in mind that your contributions to Roth 401k are based on your self-employment earnings and will be limited to $24,500 ($18,500 elective deferrals + $6,000 catch up). You can contribute there regardless if you take distribution from your Roth IRA or not.

The amount of conversion is taxed at the ordinary income tax rate. This depends on your tax bracket. When you do the conversion, depending on your current income level and the amount you wish to convert, it may bring you to a higher tax bracket, be sure to consult with your CPA about tax implications. Usually, they year with lower income is when you would want to do the conversion.

Brian Eastman · Answer

@Daniel Dietz

If your qualifying self-employment income allows you to make a new contribution to the Solo 401(k) then you can do so.

Whether you make that contribution out of the business income or from other savings does not matter.  So yes, you could incrementally "move" the Roth IRA to the Solo 401(k) in the fashion you describe.

The down side is that you are giving up the possibility of really making new Roth contributions.  My moving existing Roth funds in this fashion, you are negating the ability to add new Roth funds to your overall portfolio.

Justin Windham · Answer

@Daniel Dietz

You're right, your qualified Roth distributions would not be taxable.

I agree, that accurate values need to be established and a formal appraisal is the most conservative approach in being able to show that you went to the greatest effort/cost in attaining that value. That said, some attorneys advise that a comparative market analysis or a broker's price opinion is sufficient. Those can often be obtained at little or no cost.

Daniel Dietz · Answer

Thanks for the replies from all of you.

@Brian Eastman you make a good point that 'moving' ROTH funds would 'use up' my 'yearly limits', therefore potentially not allowing me to put *additional* ROTH funds in, relative to what I already have (but sitting in a SDIRA, not the SOLO401K). In my case, at this time, I am pretty comfortable with the amount I have save up in retirement accounts, and the bulk of that is already in ROTHS. If someone was younger or looking to build up their funds this would be a big concern.

@Dmitriy Fomichenko in regards to 'converting' traditional funds over that are already in my SOLO401K to the ROTH component, if those 'funds' are say a rental that I paid 100K for, do I need to get an official appraisal of that property to covert things? What happens if I want to maybe just 'convert over' 20K worth of per year, would I need a new appraisal every year?

@Carl Fischer I am of the understanding that I would  *not* have to pay any tax to do this. I would just be taking out the amount of my original contributions, which I thought were tax free since it is 'after tax' funds? Maybe I am misunderstanding that.

I see your point about a SDIRA not being that hard to manage, but I am really liking using the leverage in my SOLO401K for higher returns, and less paperwork that if borrowing in the SDRIA.

One of my other goals is to 'get all my retirement funds' in 'one plan' (meaning not a separate SDIRA & SOLO401K). My understanding is that it is not allowed for say my SDIRA & my SOLO401K plans to 'partner' of investments. By having all of the funds in one place, it seems like it would simply things if when I want to say sell some of my rentals and invest in something more passive like a Syndication. Does that make sense?

Thanks again for all the time that you all give to help us all understand what at times can be a confusing topic!

Dan Dietz

George Blower · Answer

To learn more about the Roth conversion rules, see the following.

https://www.irs.gov/retirement-plans/rollover-to-a...

https://www.irs.gov/retirement-plans/retirement-pl...

Dmitriy Fomichenko · Answer

@Daniel Dietz,

Roth conversion is a taxable event therefore you need to establish accurate market value at the time of convention. You will be required to do a formal third party appraisal every time you do the conversion.

Carl Fischer · Answer

@Daniel Dietz

It makes no sense to take a Roth IRA withdrawal to pay tax and contribute to the solo 401k Roth . It’s not that much harder to have a Roth IRA do investments-find some borrowers and make loans or something that doesn’t require a non recourse loan. In addition, you most likely will want to move your Roth 401k to your Roth IRA when you reach 70.5 years old so you won’t be forced to take required minimum distributions (RMDs).  Unless you want the government telling you when and how much to take.

Getting Money from ROTH IRA to ROTH SOLO401K?

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