Self-Directed Solo 401k Roth Solo 401k Recharacterization Question
QUESTION: I am thinking about doing an in plan Roth 401k conversion of the remaining funds in the pre-tax part of my solo 401k plan (around $300K). I am with my tax advisor now and we are questioning if this could be recharacterized (undone) later in 2016 when my tax situation becomes clearer. We know we could do this if it were in an IRA.
ANSWER: That is a great question and the short answer is no. Unlike a Roth IRA conversion that can be returned to a traditional IRA as long as it is processed by October 15 of the year following the conversion even if you did not request an extension to file your prior year tax return, 401k funds including solo 401k funds that have been converted to a Roth 401k status (known as an in-plan conversion) cannot be recharacterized to pretax 401k funds once converted. This is one of the main differences between Roth IRA conversions and Roth 401k conversions.If you wish to proceed with the in-plan Roth solo 401k conversion, your solo 401k provider will need to document and report the in-plan Roth solo 401k conversion to the IRS using Form 1099R.
More Roth Solo 401k in-plan conversion tips
Tip 1: Roth 401k conversions are reported on form 1099R using code “G” not codes 2 or 7 which are the codes used to report Roth IRA conversions.
Tip 2: When converting pretax solo 401k assets such as physical real-estate to a Roth solo 401k, the property must be appraised by a third-party valuation provider to ensure the correct value being converted is reported on form 1099r.
Tip 3: Once converted the Roth Solo 401k funds can later be transferred to a Roth IRA which is a good planning option because Roth solo 401k plans are subject to required minimum distributions (RMDs), but Roth IRAs are not.
Tip 4: The Roth Solo 401k conversion rules allow for the conversion of after-tax funds provided the solo 401k provider's plan documents allow for it.
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