A Solo 401k plan from MySolo401k.net comes with a designated Roth Solo 401k option, permitting the owner-only business owner to transfer eligible rollover distributions to a designated Roth Solo 401k account from another account in the same Solo 401k plan. The Roth Solo 401k contribution program must be in place before a plan can offer in-plan Roth Solo 401k rollovers. A Roth Solo 401k program cannot be set up solely to accept in-plan rollovers – it must also accept elective deferrals from the owner-only business owner. As such, a Solo 401k plan from MySolo401k.net not only incorporates the Roth Solo 401k account but comes with Solo 401k checkbook control; therefore, 2 checking accounts may need setup at your local bank–one for Traditional Solo 401k contributions and the other for Roth Solo 401k contributions and in-plan rollovers.
Distributions eligible for in-plan Roth Solo 401k rollovers
Not all pre-tax Sol 401k plan amounts may be transferred to a designated Roth Solo 401k account. To be eligible for an in-plan rollover, the amount must be eligible for distribution to the Solo 401k participant under the terms of the Solo 401k plan and must be otherwise eligible for rollover (an eligible rollover distribution).
In general, an eligible Solo 401k rollover distribution is a distribution that is not:
- A required minimum distribution,
- A corrective distribution of excess contributions or deferrals,
- A hardship distribution,
- A loan treated as a distribution,
- A distribution that is one of a series of substantially equal payments made at least annually over a lifetime or 10 years, or
- The cost of life insurance coverage.
Owner-only business owner tax consequences of in-plan Roth Solo 401k rollover
The value of the distribution less the business owner’s basis, if any (the taxable amount of the distribution) must be included in the business owner’s gross income. For a general rollover of money from a pre-tax Solo 401k account, the entire amount of the rollover, including earnings, will be taxable.
The additional 10% early distribution tax does not apply to an in-plan Roth Solo 401k rollover. Nonetheless, there are special rules that could make the rollover subject to this tax if it is withdrawn from the designated Roth Solo 401k account within five years.
In-plan rollover amount is included in gross income in year of in-plan rollover
The business owner must include any previously untaxed amounts in gross income during the year the in-plan rollover occurs.
In-plan rollover is irreversible
An in-plan rollover to a designated Roth Solo 401k account is irreversible once the transfer is processed. The amount may not later be recharacterized or redeposited to the account it came from. This treatment is different from rollovers to a Roth IRA, which is permitted to be recharacterized before the tax return due date.
Withholding on in-plan Roth rollovers
20% mandatory withholding does not apply to an in-plan Roth direct rollover. However, if you receive your distribution in cash, 20% withholding will apply even if the amount is rolled over to a designated Roth account within 60 days.