In-Plan Roth Rollovers aka Converting Solo 401k to Solo 401k Roth: Self-Directed 401k | Solo 401k | Individual 401k | Solo K

In-plan solo 401k Roth rollover defined

An in-plan Roth rollover is the movement of assets from your existing Solo 401k to a designated Roth Solo 401k account within your existing Solo 401k plan. Note that a Solo 401k plan is also referred to as a self-directed 401k, individual 401k or Solo K.

In-plan Roth rollovers resulted from the enactment of the Small Business Jobs Act of 2010.

Allowing for in-plan Roth rollovers

 
Only Solo 401k plans like the one offered by Mysolo401k.net that have designated Roth account option are permitted to offer in-plan Roth rollovers.

Process of doing an in-plan Roth Rollover

There are two ways to do an in-plan Roth rollover:

Direct rollover—as trustee of the solo 401k plan, by internally transferring an eligible rollover distribution from the Solo 401k plan’s non-Roth account to a designated Roth account in the same solo 401k plan, or

60-day rollover—by taking an eligible Solo 401k rollover distribution from the Solo 401k plan’s non-Roth account and subsequently depositing all or part of that distribution to a designated Roth account in the same Solo 401k plan within 60 days.

Recharacterizing (unwinding) an in-plan Roth rollover

The rules do not allow for the recharacteraztion of an in-plan Roth rollover (i.e., an in-plan Roth rollover cannot be returned to non-Roth status).

Distributions Types that qualify for in-plan Roth rollover

 1. Rollover contributions

 2.   After-tax contributions

 3. Employer profit-sharing contributions –but only when following   requirements are met:

•  Attainment of age 59 ½
• The employer contributions being converted have been in the plan for at least 2 years, or the participant has participated in the solo 401k plan for at least 5 years.

4. Salary deferrals (pre-tax elective deferrals)—only when you reach age 59 ½

Taxation of Solo 401k in-plan Roth Rollovers

Amounts processed as in-plan Roth rollovers are taxed in the same year and added to your gross income for the tax year.

In-plan Roth direct rollover is not subject to the 20% mandatory tax withholding; however, since you have to pay taxes either when you do the conversion or when you file your income tax return, it is recommended that you pay the 20% tax upfront to avoid having to increase your federal income tax withholding or make estimated tax payments to avoid underpayment of tax penalty.

The 10% early distribution tax does not apply to In-plan Roth rollovers at the time of processing. However, if withdrawn before a 5-taxable-year period the 10% may apply. Send us an e-mail at info@mysolo401k.net for more information on this.

Tax reporting in-plan Roth direct rollover

Reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc by:

• Including the amount you rolled over in box 1 (Gross distribution)
• Including the taxable amount you rolled over in box 2a (Taxable amount)
• Reporting your basis in the amount rolled over in box 5 (Employee contributions)
• Using distribution code “G” in box 7

Tax reporting in-plan Roth rollover on your tax return
You are required to:

• File Form 8606, Nondeductible IRAs, with your  tax return; and
• Complete Form 8606, Part III, to report your in-plan Roth rollover.