Passed by Congress on January 1, 2013 and signed into law by the president on January 2, 2013, the American Taxpayer Relief Act of 2012, lifted the following restrictions from Roth Solo 401k conversions (also known as in-plan rollover to designated Roth Solo 401k account):
Pursuant to Sec. 902 of the newly passed ATRA, effective for tax year 2013 and after all eligible rollover distribution amounts in a Solo 401k can be converted to a Roth Solo 401k. This includes the following types:
- Employer profit sharing contributions (under the old law, you had to wait until you attained age 59 ½ and after the contributions had been in the Solo 401k plan for at least 2 years).
- Any solo 401k owner/participant at any age can convert voluntary after-tax solo 401k funds to a Roth solo 401k (in-plan Roth conversion). As a result, those who are looking to supercharge their tax free solo 401k funds can now make voluntary after tax solo 401k contributions and then convert them to a Roth Solo 401k. Making after-tax contributions is another way of ultimately getting more money into a Roth solo 401k.
- All salary deferral amounts (under the old law, you had to wait until you reached age 59 ½).
- Under the prior law, only funds rolled over from IRAs and qualified plans could be converted to a Roth Solo 401k without the above restrictions.
- Once voluntary after-tax or pretax solo 401k funds have been converted to a Roth solo 401k, they must stay converted so the recharacterization rules do not apply like.
- In order to convert voluntary after-tax solo 401k funds to a Roth Solo 401k, the solo 401k plan documents must allow for voluntary after tax solo 401k contributions and Roth solo 401k designated accounts.
- The 10% early distribution penalty does not apply to conversion of voluntary after-tax or pretax solo 401k funds to a Roth solo 401k.