Move the Pre-tax Portion of the Solo 401k to the Roth Solo 401k
If we want to move amounts from the pre-tax portion of the solo401k to the Roth portion of the solo401k:
QUESTION 1)
How do we do that if we are moving from a Wells Fargo or Fidelity Pre-Tax account to a Wells Fargo or Fidelity Roth account inside the Solo401k? How do we document that on our tax return and elsewhere?
ANSWER:
Your solo 401k provider will need to assist with the in-plan conversion as you will need to complete an in-plan solo 401k conversion form and the amounted converted will need to be reported to the IRS on a Form 1099-R using code "G" in box 7 and the taxable amount will need to be listed in box 2a.
Income taxes are paid on the amount converted and paid with non solo 401k funds. You pay the taxes due on the conversion when your file the Form 1040 tax return.
You move the funds from the solo 401k pretax bank account directly to the Roth solo 401k bank account by writing a check made payable in the name of the solo 401k and then depositing the funds directly into the Roth solo 401k brokerage/bank account not your personal bank account.
QUESTION 2)
If we have an LLC inside the solo401k and we want to transfer some (but not all) of the LLC value from the pre-tax portion of the solo401k to the Roth portion of the solo401k, how do we document that on our tax return and elsewhere?
ANSWER:
The reporting is done in the same fashion as described above in question 1. However, you will need to get a valuation for the LLC to make sure the correct amount is reported as being converted. If the correct amount is not reported and it results in under reporting, the IRS will loose out on tax revenue since in-plan solo 401k Roth conversion are taxable. What is more, the valuation needs to be performed by a third-party valuation provider not you as the solo 401k trustee.
QUESTION 3)
Are there any limitations on how much can be transferred in a year?
ANSWER:
Good question. No but some like to convert small portions because the amount converted gets added to your taxable earned income for the year which may bump you into a higher tax bracket.
QUESTION 4)
If we remove money from a separate Roth IRA as a distribution and then make a Roth contribution contribution to our Solo401k- how do we document that on our tax return and elsewhere.
ANSWER:
I give you an "A" for creativity but an "F" for compliance. :)You cannot do this as the solo 401k contribution rules only allow for contributions based on net-self-employment income. What you are describing is a roundabout transaction in that you would be depositing Roth IRA funds into a 401k which is not allowed (Roth IRA Transfer Restriction).
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