QUESTION:
My understanding is that it is not permitted to transfer a Roth IRA into a Roth Solo401(k). Recognizing this, I was planning on transferring the Roth 401(k) that I have from a previous employer to my new Roth Solo401(k) once I’ve set it up.
My question is related to options for directing funds from the pre-tax portion of the 401(k) from my previous employer to a Roth Solo401(k). My understanding is that both of the options shown below are available
- Convert the pre-tax to the Roth account within the 401(k) from my prior employer prior to transferring to the new Roth Solo401(k)
- Convert some or all of the pre-tax balance to the pre-tax portion of the the Solo401(k) and then do conversion(s) within the Solo401(k)
On a related note to #2, I understand that if I transfer all or a portion of the pre-tax balance in the 401(k) from my previous employer to a Traditional IRA, I would later have the option to transfer a portion of the Traditional IRA to the pre-tax account of the Solo401(k) and would be able to then do a conversion to the Roth account in the Solo 401(k).
Could you please confirm or correct my understanding?
ANSWER:
Here are items to consider when deciding to convert pretax funds from your former employer 401k to a Roth 401k, including a Roth solo 401k if you are self-employed.
Option 1: Process an In-Plan Conversion Under the Former Employer 401k
Under this option, you would process the in-plan conversion (i.e., convert pretax 401k to Roth 401k) within the former employer 401k where that plan’s administrator would move the funds internally from the pretax 401k to the Roth 401k (aka designated Roth account), and subsequently perform the Form 1099-R reporting with the IRS to report the taxable conversion. Finally, you would then transfer the Roth 401k to the Roth solo 401k when ready.
Option 2: Convert Former Employer Pretax 401k Funds to the Roth Solo 401k
Under this option, the administrator of your former employer’s 401k plan still performs the required IRS reporting for the conversion of the pretax 401k funds to the Roth solo 401k and issues the Form 1099-R; however, they also make the check payable in the name of the Roth solo 401k and mail it to you as the trustee of the solo 401k and you then deposit the check directly into the Roth solo 401k bank or brokerage account.
Option 3: Directly transfer the Former Employer 401k Petax Funds to the Pretax Solo 401k
Here the former employer 401k pretax funds are transferred to the pretax solo 401k. The former employer plan’s administrator will report the movement of the funds as a non-taxable direct rollover from the pretax 401k to the pretax solo 401k using a code “G” in box 7 of the Form 1099-R. Then, once the funds are inside your pretax solo 401k, you can then work with your solo 401k plan provider in processing the in-plan conversion of pretax solo 401k funds to the Roth solo 401k. The solo 401k plan provider will also document the conversion and issue the Form 1099-R to report the taxable conversion. For client’s of My Solo 401k Financial, see the following form: https://www.mysolo401k.net/pretax-to-roth-solo-401k-in-plan-conversion-form/
And see the following for items to consider prior to deciding to process the in-plan conversion of pretax solo 401k funds. https://www.mysolo401k.net/items-to-consider-if-you-plan-to-process-a-self-directed-roth-solo-401k-pretax-in-plan-conversion-in-2023/
Note: under all of the options described above where pretax 401k funds are ultimately converted to the Roth 401k including the Roth solo 401k, not only is conversion taxable but you will pay the taxes due on the conversion with funds outside the 401k plan and they are due by your personal business tax return (generally April 15) of the following year for conversions processed by 12/31 of the prior year. For example, any pretax conversions processed in 2023 would have taxes due on the conversion by April 15, 2024.
