By: Mark Nolan
October 15, 2014
Last Updated January 16, 2021
Can I transfer or rollover a Roth IRA to a Roth Solo 401k?
NO. Only a Roth IRA can be Rolled Over to another Roth IRA
1.408a-10 Q&A 5 and IRS Publication 590 state that a Roth IRA cannot be transferred/ rolled over to an employer retirement plan, so because a Solo 401k (also commonly referred to as a self-directed 401k and Individual 401k) is a type employer plan, but for the self-employed, this restriction also applies.
The reason why a Roth IRA may not be rolled over/transferred to a Solo 401k include the following:
First Reason – the five-year period
While the five-year holding period, a rule that must be satisfied in order to distribute the earnings tax-free, applies to both a Roth IRA and a Roth Solo 401k, it is not applied exactly the same to both retirement vehicles.
The Roth IRA 5 Year Period
The five-year waiting period starts as soon as the first Roth IRA is opened. So even if multiple Roth IRAs are opened in different years, the five year period for all of them will be based on the first Roth IRA opened.
The Roth Solo 401k 5 Year Period
For a Roth Solo 401k, the five-year period separately applies to each 401k including a solo 401k. For example, if you work for company X from 2009-2012 and make Roth 401k contributions, the 5-year period begins in 2009. Further, let’s say you then leave your job in 2012, and become self-employed (company Y) in 2013 so you open a Solo 401k and make Roth Solo 401k contributions. Well, a new five year-period will begin on the Roth Solo 401k contributions in 2013. However, if you decide to directly roll over/transfer the Roth 401k funds from your previous employer (company X) to your new Roth Solo 401k with company Y, the Roth Solo 401k funds with the self-employed business would start the five-year period from 2009.
Another difference deals with the direct rollover/transfer of a Roth Solo 401k to a Roth IRA whereby the five-year period under the Roth IRA rules apply instead of the Roth Solo 401k five-year waiting period.
For example, let’s say that you made contributions to your Roth Solo 401k from 2010 through 2012 and then transferred the Roth Solo 401k funds to a newly opened Roth IRA in 2013, the five-year waiting period would start as of 2013, the year the Roth IRA was opened. However, let’s say instead that the Roth Solo 401k funds were transferred to a Roth IRA that was opened in 2006 (more than 5 year ago), well, because the Roth Solo 401k funds were transferred to a Roth IRA that had already satisfied the five-year period, the Roth Solo 401k funds would automatically satisfy the five-year period.
Second Reason – the distribution rules are different.
Partial distributions from a Roth IRA prior to reaching age 59 1/2 differ from distributions made from a Roth Solo 401k before age 59 ½ in that the ordering rules apply to a Roth IRA but not a Roth Solo 401k.
For example, under the Roth IRA distribution rules, the Roth contributions can be distributed first, conversions next (on a first in, first out basis), and earnings last. However, Solo 401k rules require partial distribution of Roth Solo 401k funds—that have not met the requirement for tax free distribution of earnings—to be distributed on a pro-rata basis (that is, a proportional amount of Roth Solo 401k and earnings), which are taxable.
Therefore, if the Solo 401k owner terminated his or her Solo 401k plan and distributed part of the Roth Solo 401k funds at age 40, the distribution would be made-up of a pro-rata amount of Roth Solo 401k contributions as well as earnings on the Roth Solo 401k contributions. Therefore, income taxes would apply to the earnings as well as the 10% early distribution penalty because you are under age 59 ½.
Additional Information
Creating a Designated Roth Solo 401k Contribution Program
Contributing to a Designated Roth Solo 401k
Designated Roth Solo 401k Account Distributions
In-Plan Rollovers to Designated Roth Solo 401k Accounts
Can I transfer or rollover a Roth IRA consisting Roth 401k funds to a Roth Solo 401k?
