Conversion to Roth Solo 401k and Cutoff Questions

QUESTION: If I contribute to my 2012 non-Roth Solo 401k contribution employer profit sharing after Dec 31 but by April 15 and also convert it to Roth by April 15, do I pay the tax for rollover to Roth for 2012?

ANSWER:  A Solo 401k in plan rollovers is taxed in the year of conversion and included in gross income. As such, if you proceed with making a profit sharing contribution to the Solo 401k bank account holding your pretax funds for tax year 2012 by 12/31/2012 and then convert the profit sharing contribution to a Solo 401k Roth by April 15, 2013 (technically referred to as an in-plan rollover), the total amount converted will be included in your gross income for tax year 2013.

You will report and pay the taxes on the in-plan conversion amount when you file your taxes in 2014.

Moreover, don’t get the types of Solo 401k contributions mixed up or confused.  It is important to understand that contributions to a Solo 401k consist of two types, which are:

Type 1 Solo 401k Contribution: Employer contributions also known as profit sharing contributions. For a corporation, profit sharing contributions are based on 25% of W-2 income from self-employment.  Further, Solo 401k profit sharing contributions may only be deposited to the non-Roth Solo 401k bucket or bank account. It is important to note that the Solo 401k contribution rules require separate accounting of Solo 401k Roth funds vs. pretax Solo 401k funds.

Type 2 Solo 401k Contribution: Employee or salary deferral contributions  is the second type of Solo 401k contribution and for tax year 2012 are capped at $17,000 or $22,500 for those who either turn 50 in 2012 or are over age 50.  It is important to understand that only employee contributions are allowed to be contributed to the Roth Solo 401k, not the employer or profit sharing contribution.

QUESTION: What is the cut-off for paying taxes for rollover to Roth 401k Solo? Is it Dec 31?

ANSWER: Taxes on in-plan rollovers or Roth Solo 401k conversion are included in your gross income and paid when you file your tax return.  Note that this is different from when you make a distribution from a Solo 401k plan, which requires that you electronically make the mandatory 20% federal tax payment based on the amount distributed by the 15th of the month following the date of the Solo 401k distribution, and file Form 945-“Annual Return of Withheld Federal Income Tax by January of the year following the Solo 401k distribution.



About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>