Roth solo 401k funds also known as designated Roth account assets will eventually find their way into Roth IRAs for various reasons such as the following:
- The self-employed individual may no longer be self-employed and will thus need to transfer her Roth solo 401k to a Roth IRA to avoid having to cash-out her Roth 401k funds.
- Based on current Roth IRA regulations (year 2020), required minimum distributions (RMDs) don’t apply to Roth IRAs whereas they do apply to Roth solo 401k accounts once the participant reaches age 72; therefore, those solo 401k owners with Roth solo 401k funds that don’t want to be forced to take distributions form their Roth solo 401k funds may look to transfer the account to a Roth IRA.
Therefore, it is important to understand the rules when moving funds from a Roth Solo 401k to a Roth IRA as specific reporting and rules apply to both the releasing solo 401k provider and the Roth IRA custodian that receives the funds. Some of these rules include the following.
- Solo 401k Participants may roll over designated Roth solo 401(k) assets (including alternative investments such as real estate, notes, tax liens and metals, to name a few) to Roth IRAs even if they are not otherwise eligible to contribute (or convert Traditional IRA assets) to a Roth IRA.
- If a non-qualified Roth solo 401k distribution is rolled over to a Roth IRA, the nontaxable and taxable rollover amounts are still tracked, but the Roth IRA five-taxable-year period applies.
- If a distribution is only partially rolled over, the taxable portion is deemed rolled over first.
- If a qualified distribution from a designated Roth solo 401kaccount is rolled over, the entire amount of the rollover contribution is considered basis in the Roth IRA, regardless of whether the solo 401kparticipant has met the Roth IRA five-taxable-year period.
- Once the rollover is completed, the Roth IRA distribution ordering rules always apply.
- Rollovers from Roth IRAs to designated Roth accounts are not allowed-this is a Roth IRA regulation. Click here for more on this.