Items to Consider Before Processing a Conversion of Pretax Self-Directed Solo 401k funds to a Roth IRA

Are you considering converting your traditional (pretax) solo 401k to a Roth IRA in 2021?

Consider the following before proceeding:

The 2021 December 31 Deadline

The deadline for a 2021 Roth conversion is December 31, 2021. This means that the funds and/or assets must be deposited from the solo 401k pretax bank/brokerage account to the Roth IRA account by 12/31/2021 in order to count for the 2021 tax year.

Plan for Taxes

The conversion of pretax solo 401k funds to a Roth IRA will trigger taxes at earned income tax rates, and state taxes may apply depending on your state of residence.  The Roth conversion income will increase your ordinary income for 2021 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth IRA will be distributed completely tax-free.

Reasons to Proceed with the Roth Conversion 

If you choose to proceed with the Roth conversion, here factors to consider. Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their solo 401k, and have long retirement savings timelines to work with.

Reasons not to Processing a Conversion

Conversion may make sense for some but is not for everyone.   A conversion may not be right for you if:

are older and will need the money soon;

you think you will be in a lower tax bracket at retirement; and

not having available, non-retirement assets to pay the tax due on the Roth conversion.

No Do Over

Just like Roth solo 401k conversions, you cannot change your mind once the Roth IRA conversion has been processed.

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 >>

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