New Law Makes Solo 401k More Popular
The American Taxpayer Relief Act allows all amounts in a 401k including a to be converted to a roth solo 401k.
As a result, those who are looking to supercharge their tax free solo 401k funds can now make after tax solo 401k contributions and then convert them to a Roth Solo 401k. Making after-tax contributions is another way of ultimately getting more money into a Roth solo 401k.
There is more great news. Because of this new law, any solo 401k owner/participant at any age can convert after-tax solo 401k funds to a Roth solo 401k (in-plan Roth conversion).
Compliance Notes
- Once after-tax funds have been converted to a Roth solo 401k they must stay converted so the recharacterization rules do not apply like they do Roth IRAs.
- In order to convert after-tax solo 401k funds to a Roth Solo 401k, the solo 401k plan documents must allow for after tax solo 401k contributions and Roth solo 401k accounts.
- The 10% early distribution penalty does not apply to conversion of after-tax solo 401k funds to a Roth solo 401k.
Comments (2)
1. Yes just the the after-tax solo 401k funds can be converted (in-plan conversion) to a Roth Solo 401k, provided i) the solo 401k plan documents allow for in-plan Roth conversions and ii) the after-tax solo 401k contributions are made to a separate holding account. Note: It is best to convert the after-tax solo 401k contributions immediately so that there are no earnings.
2. The rules are slightly different for those who want to convert their after-tax solo 401k contributions to a Roth IRA than they are for those above in number 1 where the after-tax funds are processed within the plan to a Roth solo 401k. In order to convert after tax solo 401k contributions to a Roth IRA, the solo 401k plan documents will have to allow for in-service distributions unless you are no longer self-employed.
Mark Nolan, over 9 years ago
If I have traditional (tax-deferred) funds in my solo 401k, can I convert only the after-tax contributions to roth and leave the traditional funds as tax-deferred? That is, can I convert only the after-tax amount, and not do a pro-rata conversion?
James Cassell, over 9 years ago