Pretax and Roth Self-Directed 401k Contributions

QUESTION: I noticed in reading some of your information on your website regarding Roth contributions.  It said something about having 2 checkbooks to help keep track of pre-tax and after tax monies.  I do have some Roth (after tax monies) in my current plan. In the past these monies have been invested with the pre-tax monies together. My TPA then just figures what % of the total plan assets are after tax and what % are pre-tax.  Is this not allowed under the current structure?  Please advise.

Lisa in MI

ANSWER: Yes the IRS is crystal clear regarding the requirement that Roth and pretax 401k funds are separately tracked and not commingled. Therefore, I highly recommend reviewing your plan with your TPA to ensure separate subaccounts are setup to hold the pretax and Roth funds. In the retirement industry, Roth 401k funds are held in what is called a Roth designated account. Further, assuming you have a self-directed 401k, you should check with your self-directed 401k provider to confirm that your 401k plan allows for Roth contributions are not all 401k plans do.

If you think about it, it makes sense that pretax and Roth funds are separately accounted for using separate holding accounts (e.g., bank accounts or brokerage accounts) since contributions to Roth 401k plans are made with after-tax funds but the gains grow tax free. This is obviously different then pretax 401k funds which generally consist of contributions that that have been deducted from your taxable income when made but the contributions and gains are both taxable when distributed.

To see specific language surrounding the designated Roth account requirement, visit “Qualified Roth Contribution Program” of publication 560.

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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