QUESTION: I want to convert some solo 401k funds to a Roth Solo 401k now that ATRA allows for all solo 401k pre-tax contribution types to be converted, but I don’t know if partial Roth Solo 401k conversions are allowed. Can you please shed some light on partial Solo 401k Roth conversions?
Thanks, Jennifer P. from Ohio
ANSWER: Yes the in-plan Roth solo 401k conversion rules permit partial Roth Solo 401k conversions. In fact, you may want to consider doing partial conversions over a number of years and therefore spread the payment of taxes since income taxes apply to the amount converted. A partial in-plan conversion makes sense if you don’t anticipate having enough funds to cover the tax due on a full Roth solo 401k conversion since, unlike Roth IRA conversions that can be recharacterized (converted back to a Traditional IRA), once a Roth Solo 401k conversion is processed it is deemed irrevocable.
You may need to first consult with your solo 401k provider to confirm that their Solo 401k plan document allows for in-plan Roth conversions, whether partial or full conversions, since the in-plan Roth Solo 401k feature is not an IRS requirement but rather an optional plan provision.
Here is what section 1002(a) of the American Taxpayer Relief Act of 2012 (ATRA) details about offering the in-plan conversion option:
“The plan may allow an individual to elect to have the plan transfer any amount not otherwise distributable under the plan to a designated Roth account maintained for the benefit of the individual”