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). See the following for more on this rule: https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#irr5
Distributions Types that qualify for in-plan Roth rollover
Pursuant to Sec. 902 of the newly passed ATRA, effective for tax year 2013 and after all eligible rollover distribution amounts in a solo 401k can be converted to a Roth Solo 401k. This includes the following types:
- Employer profit sharing contributions (under the old law, you had to wait until you attained age 59 ½ and after the contributions had been in the Solo 401k plan for at least 2 years), and
- all salary deferral amounts (under the old law, you had to wait until you reached age 59 ½).
Click here to read our blog regarding ATRA.
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 (Roth Solo 401k) 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 email@example.com 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, etcby:
- 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 1040 tax return
If Form 1040, report Roth Solo 401k conversion amount on line 16a and 16b.
If Form 1040A, report Roth Solo 401k conversion amount on line 12a and 12b.
If Form 1040RN, report Roth Solo 401k conversion amount on line 17a and 17b.
Retirement Plans FAQs on Designated Roth Accounts:
Publication 575″Pensions and Annuity Income”, see page 29 “See in-Plan Roth Rollovers”