Roth Solo 401k opening questions

I am the CPA that you talked to today and we talked about a client of mine who wants to open solo 401k for an LLC he owns 100%. We concluded that my client is not eligible for a solo 401k because he owns & controls other businesses (100%) which have employees and one company has a Simple IRA plan.

However, I am interested in a Solo 401k plan for my company (a CPA firm), which is a sole proprietorship) and I meet all the eligibility requirements. My desire is to make Roth contributions to my solo 401k. I am 61 years old.

I spent a lot of time on your website today and was very impressed. Here are some questions I don't recall seeing answers to on your website, or which are specific to me:

1) Let's assume my business net income on sch. C for 2012 is 50,000. My maximum salary deferral as a participant would be 22,500 for 2012 since I am over age 50. My maximum profit sharing contribution would be 50,000 - 3,825 (50,000 x .153% x 50%)= 46,175 x 25% = 11,544. Therefore, the grand total maximum contribution for 2012 would be 34,044. I would want to contribute the entire 34,044 to my Roth Solo 401k as a ROTH contribution.

a) QUESTION: Do you agree with my calculations above?  

ANSWER: Actually, I came up with different calculation for the profit sharing amount of $9,299.43 using our online Solo 401k contribution calculator.

b) Please confirm that I can do a 34,044 Roth contribution to the solo 401k plan for my business in addition to a 6,000 contribution to my "personal" Roth account at Charles Schwab for 2012.

ANSWER: The rules only permit employee (aka salary deferrals and catch-up amounts) contribution to be treated as Roth Solo 401k contributions; in your case, the $22,500 amount. Therefore, the profit sharing contribution would need to be applied to the pretax Solo 401k portion.

Here is information pertaining to Roth 401k contributions from the IRS website:

Is there a limit on how much I may contribute to my designated Roth account?
“Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under Code §402(g)). The limit is $17,000 in 2012 plus an additional $5,500 in catch-up contributions in 2012 if you are age 50 or older at the end of the year. These limits may be increased in later years to reflect cost-of-living adjustments.”

Here’s the IRS link: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts

With respect to the ROTH IRA, you would need to open a Roth IRA separately with Schwab or your bank as the Roth IRA contributions cannot be made directly to the Roth Solo 401k.

Here’s information from the IRS website regarding Roth IRA contributions:

Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?
“Yes. if you are age 50 or older, you can make a contribution of up to $23,000 in 2013 to your 401(k), 403(b) or governmental 457(b) plan ($17,500 regular and $5,500 catch-up contributions) and $6,500 to a Roth IRA ($5,500 regular and $1,000 catch-up IRA contributions) for a total of $29,500 for 2013.”

c) My business has a Simple IRA plan which I intend to keep, but I will not make a 2012 contribution to that plan. Please confirm that this does prohibit me from doing what I want to above.  

ANSWER: Only if you have had the SIMPLE IRA for 2 years can your roll it over to Solo 401k. Further, the IRS rules do not permit contributions to both a SIMPLE and Solo 401k in the same year. So if you have made any contributions to your SIMPLE IRA in 2012, you cannot contribute to Solo 401k for tax year 2012.

2) QUESTION: If I have a Solo 401k for a few years and then want to roll the balance in that account to my personal Roth account at Schwab, can I do so without any restrictions?  

ANSWER: Yes you can rollover your Roth Solo 401k to a Roth IRA with no restrictions since you are over age 59 ½. 

3) Bank accounts for my solo 401k:

a) Please confirm that I would have to open two bank accounts for my solo 401k: a regular checking account plus a 2nd account titled "David L. Benson CPA Roth Solo 401k Trust".

ANSWER:  Yes two bank accounts—one for pre-tax (traditional Solo 401k) and the other for post-tax (Roth Solo 401k) contributions are required.

b) QUESTION: Would the bank designate this 2nd account as a Roth IRA account or a Roth Solo 401k account?

ANSWER: The bank would designate the account as a Roth Solo 401k, not a Roth IRA.

c) QUESTION:  What if I decide to split my contribution between a Roth contribution and a pre-tax contribution? Would I need a 3rd bank account for the pre-tax contribution and would the bank designate that account as an IRA account or a Solo 401k account?

ANSWER:  Only two bank (2) accounts would be required—one for the Roth Solo 401k and the other for the Traditional Solo 401k funds.  However, if you decide to open a Roth IRA, it would have to be opened separately and it would not be associated with the Solo 401k since they are two different animals.

d) QUESTION: My wife and I have all our existing retirement accounts at Schwab. Do you see any problem putting all my solo 401k accounts with Schwab? I talked to Schwab and they told me I could have a solo 401k account there even if I use the plan of a 3rd party (like you) instead of Schwab's solo 401k plan.

ANSWER: I don’t see a problem with having all of your retirement accounts under one umbrella. That’s really up to you.

Thanks,

DB