ROTH Solo 401k Designated Account Direct Rollover to ROTH IRA

QUESTION: 

I want to roll over some of my Solo 401k Roth account to a Roth IRA. My understanding is that I am free to do this, correct?

ANSWER: 

Because you are under age 59/12, and; therefore, have not satisfied both requirements under the Roth 401k Designated account distribution rules ( the need to both have had the Roth 401k designated account for 5 years and age 59/1/2 or older), the transfer of the Roth 401k designated account to a Roth IRA would not be deemed a qualified distribution.

As a result, assuming you want to transfer the entire Roth 401k Designate account, which consists of both basis and earnings, to a Roth IRA, the full amount can be transferred but you will need to pay taxes on the gains.

Here is an illustration:

Jeff has had the Roth 401k designated account for 6 years, but is under age 59 1/2; the Roth 401k designated account has a balance of $100,000--consisting of $75,000 basis and $25,000 gains. He now wants to transfer the entire Roth 401k Designated account to a Roth IRA.

Even though Jeff has had the Roth 401k designated account for 5 years or more, he is under age 59 1/2. As a result, he will need to pay taxes and a 10% early distribution penalty on the $25,000.

Note that the up-front 20% mandatory federal tax does not apply at the time of the Roth 401k distribution, but Jeff will need to pay taxes on the $25,000 when he files his personal tax return next year. Therefore, he will be able to transfer the entire $100,000 from the Roth 401k Designated account to the Roth IRA now.

For more information surrounding the Roth Solo 401k Distribution Rules CLICK HERE.