Solo 401k Roth Conversion Opportunities During Market Volatility

Recent stock market fluctuations and the possibility of continued market turmoil can have a negative impact on solo 401k plans that hold equity investments. While your solo 401k stock portfolio value may be upside down, this may be an opportunity to make lemonade by processing an in-plan Roth solo 401k conversion.

The conversion of pretax solo 401k funds to the Roth solo 401k designated account does not have to be done in cash. Pretax solo 401k funds including equities such as stocks and index funds may be converted to the Roth solo 401k. This is referred to as an in-plan Roth solo 401k asset conversion.

Roth Solo 401k Conversions

During a market downturn may be the best time to process a conversion of pre tax solo 401k funds to the Roth solo 401k. By converting your beaten down solo 401k stock portfolio holdings to the Roth solo 401k, the tax bite won’t be as high since you are converting at a lower value.

From a future perspective, unlike pre tax solo 401k funds, Roth solo 401k funds are not subject to required minimum distributions (RMDs), and alleviates having to plan for the increase of future tax rates because qualified Roth solo 401k distributions are tax free.

By processing a Roth solo 401k conversion when the stock market is low, the future investment growth the will be reaped inside the Roth solo 401k plan.

Permanent

Once the Roth solo 401k conversion has been processed, you can’t change your mind and recharacterize the conversion. You can learn more about this no do over rule in the Tax Cuts and Jobs Act of 2017 (TCJA).

Form 1099-R Reporting

Whether cash or stocks are converted from the pretax solo 401k to the Roth solo 401k designated account (in-plan conversion of pre tax funds), the Form 1099-R reporting is the same. The conversion is taxable at the federal level, and depending on your state of residence, state taxes also apply. Both the federal and the applicable taxes are paid with non solo 401k funds so personal funds when you file your personal tax Form 1040 return, for example.

Procedure: If Using Solo 401k Brokerage Accounts (e.g., Fidelity, Schwab, etc.)- In-Plan Pre Tax Solo 401k Roth Conversion

Step 1. Open the Brokerage Account: Make sure to open a brokerage account to hold the Roth solo 401k funds if you have not already done so. Please send us an email to: [email protected] if you have not yet opened the additional brokerage account to hold the Roth solo 401k funds so that we can assist. Make sure to reference your plan name. Also, if both participants (e.g., both spouses) will process a conversion, they each need separate Roth solo 401k brokerage accounts.

Step 2. The Roth solo 401k brokerage account needs to be titled in the name of the solo 401k followed by the word ROTH in parenthesis (ROTH), and use the same employer identification number for the solo 401k.

EXAMPLE: If the name of your solo 401k is “Futuristic Times Trust”, then the brokerage account to hold the Roth solo 401k funds would be titled as follows: Futuristic Times Trust (ROTH)

Step 3. Move the securities from the pretax solo 401k brokerage account to the Roth solo 401k brokerage account. You will work with your broker in moving the securities electronically.

Step 4: Report the Taxable In-Plan Conversion on Form 1099-R. We will issue the Form 1099-R by February of 2026 as long as the following on-line conversion form[CLICK HERE to complete the form] is received by 12/31/2025, so make sure to fill it out once you have moved the securities to the Roth solo 401k account.