Things to Know if You are Considering a 2016 Roth Solo 401k Conversion

Are you considering converting your traditional (pretax) Solo 401k to a Roth Solo 401k (designated Roth account) in 2016? If you are considering this important decision, here are things times you need to understand.

The December 31 Deadline

The deadline for a 2016 in-plan conversion is December 31, 2016. This means that the funds must be deposited from the solo 401k pretax bank/brokerage account to the Roth solo 401k bank/brokerage account by the 12/31. It is important to understand that you do not have until  your business tax return filing due date plus timely filed business tax return extension to do an in-plan conversion for a prior year, as you do for a Roth or pretax solo 401k contribution. Don't forget that your solo 401k provider may need more time than you think to complete the conversion transaction reporting. Waiting until the last minute can be a nail biter.  

Consider Taxes

In-plan Roth solo 401k conversion of pretax funds are subject to taxes. Your Roth 401k conversion income will increase your ordinary income for 2016 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth solo 401k will be distributed completely tax-free.

Reasons for Conversion

Should you convert? Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their solo 401k, and have long retirement savings timelines to work with.

Reasons for not Processing a Conversion

Conversion may make sense for some but is not for everyone. Why may you not want to process an in-plan solo4 401k conversion? Conversion may not be for you if:

are older and will need the money soon;

you think you will be in a lower tax bracket at retirement; and

not having available, non-retirement assets to pay the tax due on the in-plan solo 401k conversion.

No Do Over

Unlike a Roth IRA conversions where you can change your mind  and undo the conversion by recharacterizing back to a Traditional IRA, this same option is not available for in-plan solo 401k conversions. 

To learn more about the in-plan Roth solo 401k conversion rules, VISIT HERE.