Fidelity Solo 401k BLOCKS Roth Conversion During Market Downturn (How to Fix It)

If you set up a basic Fidelity Solo 401k plan and now want to execute a Roth conversion during a market downturn, you may have discovered a frustrating limitation: the standard Fidelity prototype plan document simply does not allow in-plan Roth conversions. When market values drop, this is exactly the time you want the flexibility to convert pre-tax assets to Roth status at a lower tax cost — but the basic plan keeps you trapped in the pre-tax bucket.

The good news: you don’t have to liquidate your investments or leave Fidelity. By restating your plan with My Solo 401k Financial, you can keep your accounts at Fidelity and unlock the full Solo 401k feature menu, including in-plan Roth conversions, the Mega Backdoor Roth, participant loans, alternative investments, and SECURE Act tax credits.

Who Is Eligible to Set Up a Solo 401k?

Before we dive into the restatement process, it’s worth confirming eligibility. Solo 401k plans are designed specifically for self-employed individuals, or solopreneurs. Eligibility has two parts:

1. You Must Report Self-Employment Activity

There is significant flexibility in how self-employment activity is reported. You do not need a formal legal entity. Common examples:

• Sole proprietor reporting earned self-employment income on Schedule C
• S corporation or C corporation owner receiving W-2 wages from the business
• Partnership with earned self-employment income reported on Line 14 of the K-1

Typical candidates include realtors, solo-practicing attorneys, and independent contractors.

2. No Full-Time Non-Owner, Non-Spouse W-2 Employees

You cannot employ any full-time W-2 employees other than yourself or a spouse. You may, however, work with:

• A spouse in the business — this does not disqualify you
• Independent contractors (1099-NEC recipients)
• Part-time W-2 employees below the full-time threshold (under 1,000 hours in a year, or under 500 hours per year for two consecutive years)

Why the Basic Fidelity Solo 401k Blocks In-Plan Roth Conversions

Meeting the eligibility requirements gets you into the Solo 401k game, but what you can actually do inside the plan is dictated by the plan documents. Think of a 401k as a legal entity — and like any legal entity, it’s the documents that define its powers.

The standard Fidelity prototype plan document is rigid. It was not written to include the optional in-plan Roth conversion feature. As a result, your assets are effectively locked in the pre-tax bucket. Even though Fidelity now allows limited Roth activity, it’s restricted to Roth employee contributions only. You cannot transfer pre-tax cash or assets from your pre-tax Solo 401k account to your Roth Solo 401k account if you’re stuck on the basic Fidelity plan.

Why Market Downturns May Be an Ideal Time for Roth Conversions

When you convert assets from pre-tax to Roth status, the conversion is taxable as ordinary income in the year of the conversion. Critically, you only pay tax on the value of the asset at the time of the conversion — not on what you originally contributed, and not on what it might grow to later.

If an asset has dropped in value during a market downturn, converting at that lower value means paying tax on a smaller amount. When markets recover, that recovery happens inside your Roth account, tax-free.

The Solution: Restate Your Plan with My Solo 401k Financial

The fix is a restatement. A restatement is an upgrade of your legal plan documents — think of it as a “cut and paste” operation. You cut out the restrictive basic Fidelity plan documents and replace them with the advanced plan documents provided by My Solo 401k Financial. Your investments stay right where they are at Fidelity.

Fidelity accommodates this by opening what they call non-prototype accounts (also referred to as “investment-only accounts”). These accounts tell Fidelity that your plan is now governed by third-party plan documents rather than Fidelity’s basic prototype.

What You Keep and What Changes

• Keep: Your investments, your Fidelity interface, and your overall brokerage relationship
• Change: The legal plan document governing the plan — upgraded to allow in-plan Roth conversions, the Mega Backdoor Roth, participant loans, alternative investments, and SECURE Act tax credits

How the Restatement Process Works

The restatement process involves transferring assets from your existing Fidelity basic-plan accounts into new non-prototype accounts at Fidelity. My Solo 401k Financial handles the paperwork and guides you through each step.

How In-Plan Roth Conversions Work Under Our Plan

Once your cash and assets are housed in the new non-prototype accounts governed by the My Solo 401k Financial plan, an in-plan Roth conversion is simply an internal transfer between the pre-tax and Roth sub-accounts of the same plan.

Key Features of In-Plan Roth Conversions

• No triggering event required — you don’t need to wait for a specific life event
• No annual dollar limit — convert as much or as little as you want
• No income restrictions — regardless of your income tax bracket
• In-kind conversions allowed — no need to sell shares; move the investment over as-is
• Stay fully invested — you won’t be out of the market if it bounces back

Plan Feature Comparison: Basic Fidelity vs. My Solo 401k Financial

Here’s how the two plan document options stack up:

Stress-Free IRS Compliance: 1099-R Reporting Included

In-plan Roth conversions are taxable events that must be reported to the IRS. The converted amount must be added to your income for the year of the conversion, and a Form 1099-R must be issued.

My Solo 401k Financial handles the required 1099-R reporting at no additional charge for clients who submit their conversion details in a timely fashion during the year of the conversion. You (or your advisor) can submit the conversion information 24/7 through our online form.

SECURE Act Tax Credits: Up to $1,500 Total

One of the most compelling reasons to restate is the SECURE Act tax credits. My Solo 401k Financial was the first Solo 401k provider to offer a plan that enables the solopreneur to claim these credits, which total $500 per year for three consecutive years — up to $1,500.

These are tax credits, not tax deductions. That means a dollar-for-dollar reduction in your tax liability. Importantly, these credits are not limited to newly established plans — even a basic Fidelity Solo 401k that is restated to our plan is eligible to claim the credit.

Transparent Pricing

Your Upgrade Roadmap

If you’re stuck in a basic Fidelity Solo 401k and want to unlock Roth conversions, the Mega Backdoor Roth, loans, alternative investments, and SECURE Act tax credits, here’s the path forward:

Step 1: Restate Online

Click Open Account. Answer 10 simple questions and submit payment. We prepare your plan documents the same business day.

Step 2: Open New Fidelity Non-Prototype Accounts

We guide you through opening investment-only accounts at Fidelity that are governed by our upgraded plan.

Step 3: Transfer Cash and Assets

We prepare transfer paperwork. Cash and assets move in-kind from your pre-existing Fidelity basic-plan accounts to the new non-prototype accounts — pre-tax to pre-tax, Roth to Roth.

Step 4: Convert During the Next Downturn

With the restated plan in place, you’re free to execute in-plan Roth conversions at any time — whenever market values drop and the tax math works in your favor. If you also want to turbocharge your Roth bucket with after-tax voluntary contributions, the Mega Backdoor Roth using a Solo 401k plan is now fully available to you.