Allowable Roth Solo 401k Contributions
The following funds can be contributed to a Roth Solo 401k:
- Elective salary deferrals (employee contributions–$20,500 for 2022; for 2023 the limit increased to $22,500)
- Catch-up contributions (age 50 or over–$6,500 for 2022; increased to $7,500 for 2023)
- Employer Profit Sharing Contributions effective for 2022 and later years per SECURE 2.0 Act.
- Conversions (rollovers) from IRAs or other (non-Roth) employer plans (unlimited amounts)
- Rollovers from other Roth 401k plans, Roth 403b, Roth 457 and Roth TSP (unlimited amounts). See the following.
How the 5-Year Holding Period Works When Other Employer Roth Funds Are Transferred to a Roth Solo 401k:
- If you want to take a distribution of funds that were transferred from other employer Roth plans to a Roth Solo 401k plan, the following rules apply:
These funds CANNOT be contributed to Roth Solo 401k:
- Employer profit sharing contributions (these can only be applied to the pretax Solo 401k bucket)
- Rollovers from Roth IRAs
Overview of the Roth Solo 401k Contribution Rules:
Roth Solo 401k contributions have been allowed since January 1, 2006. While our plan document allows for Roth contributions, not all Solo 401k providers allow for Roth contributions.
Roth Solo 401k is governed by the same rules as other 401k plans. Therefore, contribution and distribution restrictions apply.
The income limits do not apply to Roth Solo 401k contributions. Contributions to Roth Solo 401k are made up of salary deferrals (employee contributions), and are contributed with after-tax funds. Unlike deferrals made to regular solo 401k, amounts deferred to Roth Solo 401k do not reduce your taxable income for the tax year.
We discussed whether one can make both Traditional and Roth Solo 401k contributions on our Daily Live Webinars hosted on our My Community (Free to Join! All are Welcome!):
Examples
Ryan, a self-employed business owner, participates in a Solo 401k that allows for Roth and regular, non-Roth Solo 401k contributions. This year Ryan makes $60,000 and defers $10,000 of his self-employment earnings to his non-Roth Solo 401k account.
Non-Roth Solo 401k–the $10,000 deferral is treated as pre-tax, thereby reducing Ryan’s income by $10,000 to $50,000. It is as if Ryan only made $50,000 a year because he is only required to pay taxes on $50,000.
Roth Solo 401k— The facts are the same as above except that Ryan chooses to treat the $10,000 deferral as a Roth contribution instead. The $10,000 deferral is now considered after-tax. As a result, Ryan’s full $60,000 self-employment income is subject to withholding.
Separate Tracking of Roth Solo 401k Funds Required:
Roth Solo 401k contributions must be separately accounted for in the solo 401k plan. This is a 401k regulation. The solo 401k trustee must keep track of gains, losses, contributions and distributions in the Roth solo 401(k) account and must be able to determine the basis in the account. This is easily accomplished under a separate bank or brokerage account dedicated to holding the Roth solo 401k funds.
In-plan Solo 401k Roth Rollovers:
An in-plan Roth rollover is the movement of assets from your existing Solo 401k to a designated Roth Solo 401k account within same Solo 401k plan. Visit our blog to learn about in-plan Solo 401k Roth rollovers by clicking here.
Roth IRA Transfer Restriction QUESTION:
Can we roll our current Roth IRAs into the solo 401k program, while maintaining the account as a Roth IRA?
ANSWER:
No as the Roth IRA rules do not permit for the transfer of Roth IRA funds to a Roth 401k including a ROTH solo 401k. This is a Roth IRA rule. To lean more about this Roth IRA rule, CLICK HERE.
The Roth solo 401(k) account can only accept rollover contributions from another Roth 401k, Roth 403b, Roth TSP or Roth 457b account.
Earnings QUESTION:
Is my understanding correct that if its a Roth solo 401k the earnings act as a Roth IRA (earnings on investment as well as qualified withdrawals are tax free?)
ANSWER:
You are correct that just like a Roth IRA where the funds grow tax-free the funds also grow tax-free inside a Roth 401(k) plan.
Example QUESTION:
So for example: If by the time I am retirement age if I have 3 rental properties paid off inside the Roth solo 401k and those properties generate $36,000 annually in rental income, then that money or whatever amount I wish to take out is tax free money?
ANSWER:
Once you have had the Roth 401k for 5 years and are over age 59 1/2, you can take tax free distributions from the Roth solo 401k, so yes.
RMD In-kind Roth Solo 401k QUESTION:
What happens if I am over 73 years old and RMD’s come into play on the 401k? How do they assess what percent you have to take? Just by the amount of money in the account? Or by the overall value of the real estate? If you keep buying property you feasibly could have little money in the solo 401k trust bank account.
ANSWER:
Correct that once you reach age 73 you will need to also start taking distribution from the Roth solo 401k. If you don’t have enough cash to satisfy the RMD, the property will nee to be appraised and part of the property will get assigned in your name and reported as an in-kind distribution to satisfy the RMD. However, effective for 2024 Roth 401k plans including Roth solo 401k plans will no longer be subject to RMDs thanks to the SECURE 2.0 Act.
Is a Roth Solo 401k different than a Solo 401k Plan QUESTION:
Do I need to open two solo 401k plans if I also want to make Roth Solo 401k contributions?
ANSWER:
No. Technically, a business owner does not set up a Roth Solo 401(k). Instead, a traditional solo 401(k) is established and a Roth solo 401(k) is added as a feature. While not all solo 401k plan providers offer a solo 401k with a designated Roth account (DRA) feature, a solo 401k plan offered by My Solo 401k Financial provides for the DRA feature which is elected on the solo 401k adoption agreement.
Roth Solo 401k Contribution Limits QUESTION:
Are the Roth Solo 401k contribution limits the same for a Roth solo 401k as for a traditional solo 401k?
ANSWER:
The Roth solo 401k contribution limits are the same as the employee pretax contribution limits. Also, similar to how the Roth IRA and Traditional IRA contributions are combined, the same combination rules apply to the employee contributions that are made to a solo 401k plan.
For 2022 the maximum contribution amount is $20,500 plus a $6,500 catch-up contribution if the employee is age 50 or older.
For 2023 the maximum contribution amount is $22,500 plus a $7,500 catch-up contribution if the employee is age 50 or older.
What is more, the SECURE 2.0 Act expande the Roth solo 401k contributions limits by now allowing the treatment of employer profit sharring solo 401k contributions as Roth solo 401k contributions.
EXAMPLE:
In 2023 Greg is under age 50 so he does not qualify for solo 401k catch-up contributions. The maximum employee solo 401k contribution for 2023 is $22,500. The total employee contribution to both the pretax solo 401k and the Roth solo 401K cannot exceed $22,500 for 2023. Greg chooses to defer $11,500 to his Roth solo 401k and the remaining $11,000 to his pretax solo 401k plan.
Plan Allows for ROTH Contributions QUESTION:
Is my understanding correct that the plan allows for Roth Solo 401K contributions?
ANSWER:
Yes, you are correct, our plan allows for Roth solo 401k Contributions.
Can I transfer-out Roth solo 401k funds before 5 years QUESTION:
Even though I’m 69 years old and won’t have to take required minimum distributions from my Roth solo 401k until I turn age 73 , I’m doing some planning now. Here is my question. Can I just transfer the Roth solo 401k funds and leave the pretax solo 41k funds alone to a Roth IRA.
ANSWER:
With respect to only transferring the Roth solo 401k funds to a Roth IRA and leaving the pretax solo 401k funds alone, this can be done even though you have not had the Roth solo 401k for 5 years provided you are over age 59 1/2. However, if the Roth solo 401k funds have not satisfied the 5 year holding period, the earnings on the Roth 41k cannot be distributed from the Roth IRA without paying taxes on the earnings until the Roth solo 401k funds have met the 5 year holding period in the new Roth IRA. Therefore, you will need to separately track the Roth solo 401k earnings in the Roth IRA if you plan to take distributions from the ROTH IRA before the 5 year clock has been satisfied. It appears that you are not looking to take distribution from the Roth IRA anytime soon so this should be a mute point.
Transfer Roth Solo 401k to Roth IRA QUESTION:
In the future, can I roll the ROTH Solo 401K into my personal ROTH IRA:
ANSWER:
Yes and we will would need to issue a 1099-R to report the non-taxable transfer to the Roth IRA. Also, the following rules apply:
Immediately Contribute to Roth Solo 401k and Transfer to ROTH IRA QUESTION:
Can I convert the employee Solo Roth 401k contribution (maximum $22,500 for 2023) to a Roth IRA immediately without penalty? I am 30 years old and am not sure if I can perform this rollover without incurring a penalty. I am wanting to perform this rollover to avoid the RMD that comes with a Roth 401k but is not present with a Roth IRA. If I am able to perform this rollover, would it allow me to avoid the RMD for these funds?
Employer Contributions:
Similar to employee contributions, there are restrictions on the ability to transfer employer contributions to a solo 401(k) ( the employer contributions being withdrawn have been accumulated in the solo 401k plan for at least 2 years; or the participant has participated in the solo 401k plan for at least 5 years, etc.). However, you can make after-tax contributions (up to the lesser of 100% of your self-employed compensation or the overall limit (e.g. $66,000 for 2023) and then transfer those funds to a Roth IRA.
ANSWER:
Employee Contributions:
While it is certainly true that a Roth IRA is not subject to required minimum distributions (e.g. see our Roth IRA versus Roth 401(k) comparison chart HERE), effective in 2024 Roth solo 401k plans also won’t be subject to RMDs stemming from the passing of SECURE 2.0 Act.
You cannot transfer employee contributions such as contributions to a Roth solo 401(k) until there has been a triggering event such as turning 59 1/2 (e.g. see more on the rules regarding making a Solo 401k Distribution HERE). You can still achieve your objective, however, since our plan would allow you to make non-Roth after-tax contributions which can then be immediately transferred to your Roth IRA. As part of our services for no additional charge, we would guide you through the process to make those non-Roth after-tax contributions (e.g. the contributions would have to be made to a separate after-tax account) as well as the required reporting (even though it would not be a taxable transfer it will be a reportable transfer).
Retired and Distribution QUESTION:
Do I have to be retired from the self-employment which allows for the Roth solo 401K contributions before I can transfer the Roth solo 401k funds to a Roth IRA?
ANSWER:
- This type can only be transferred to a ROTH IRA if you are age 59 1/2 or no longer self-employed.
- This type can be transferred to a ROTH IRA at any-time.
- This type can be converted to a Roth IRA at any-time.
Distribute the After-Tax Amount QUESTION:
Can I withdraw tax free the amount that I have converted from the solo 401k voluntary after-tax account to the Roth solo 401k account?
ANSWER:
If you are asking if you can take a distribution (non-conversion) from the Roth solo 401k that was funded through the conversion of solo 401k voluntary after-tax contributions instead of transferring the funds to a Roth IRA, yes you can provided you have both had the Roth solo 401k for 5 years and have reached age 59 1/2. Otherwise, you will owe taxes on the gains. To learn more about qualified Roth solo 401k distribution rules, visit here.
Distribution Before Age 59 1/2 QUESTION:
Can I withdraw the solo 401k after-tax funds that I converted to the Roth Solo 401k tax free BEFORE 59.5 without the 10% penalty?
ANSWER:
Good question. This would fall under the non-qualified distribution umbrella. Non-qualified distributions from the Roth Solo 401k are subject to the pro-rata basis distribution rules. See the following: https://www.
Immediately Convert Roth Solo 401k Contribution to Roth IRA QUESTION:
Can I convert the employee Solo Roth 401k contribution (maximum $22,500 for 2023) to a Roth IRA immediately without penalty? I am 30 years old and am not sure if I can perform this rollover without incurring a penalty. I am wanting to perform this rollover to avoid the RMD that comes with a Roth 401k but is not present with a Roth IRA. If I am able to perform this rollover, would it allow me to avoid the RMD for these funds?
A
ANSWER:
Employer Contributions:
Similar to employee contributions, there are restrictions on the ability to transfer employer contributions to a solo 401(k) ( the employer contributions being withdrawn have been accumulated in the solo 401k plan for at least 2 years; or the participant has participated in the solo 401k plan for at least 5 years, etc.). However, you can make after-tax contributions (up to the lesser of 100% of your self-employed compensation or the overall limit (e.g. $66,000 for 2023) and then transfer those funds to a Roth IRA.
ANSWER:
Employee Contributions:
While it is certainly true that a Roth IRA is not subject to required minimum distributions (e.g. see our Roth IRA versus Roth 401(k) comparison chart HERE), effective in 2024 Roth solo 401k plans also won’t be subject to RMDs stemming from the passing of SECURE 2.0 Act.
You cannot transfer employee contributions such as contributions to a Roth solo 401(k) until there has been a triggering event such as turning 59 1/2 (e.g. see more on the rules regarding making a Solo 401k Distribution HERE). You can still achieve your objective, however, since our plan would allow you to make non-Roth after-tax contributions which can then be immediately transferred to your Roth IRA. As part of our services for no additional charge, we would guide you through the process to make those non-Roth after-tax contributions (e.g. the contributions would have to be made to a separate after-tax account) as well as the required reporting (even though it would not be a taxable transfer it will be a reportable transfer).
Separate EIN for ROTH Solo 401k QUESTION:
Does my Roth Solo 401k have to have its own EIN?
ANSWER:
No the Roth solo 401k component (designated Roth account) does not have its own EIN. Only one employer identification number (EIN) is required for the solo 401k plan. The solo 401k plan is made up of three components– pretax, Roth and voluntary after-tax contributions.
Apply 5 year Roth 401k Designated Account Clock to Previous Year QUESTION:
My OBJECTIVE here is to start the 5-year clock on 01/01/2020, so that beginning 01/01/2025, withdrawals can be made without penalty or tax on growth. This is in contrast to the 5-year clock starting on 01/01/2021. I made the first Roth solo 401k contribution in 2021 by my business tax return due date and the contribution was meant for tax year 2020. Can my Roth solo 401k clock start in 2025?
ANSWER:
Yes since you made the Roth solo 401k contribution for 2020 in 2021 by your business tax return plus timely filed business tax return extension. The 5 year clock starts in the year for which the Roth solo 401k contribution was made (e.g. 2020 Roth solo 401k contributions made in 2021 start clock on 1/1/2020).
Make Contribution in 2019 and Convert in 2020 QUESTION:
If I make my max employer 2019 contribution to my pretax solo 401k in calendar 2019 and then roll it over to my Roth solo 401k in calendar 2020, do I get the deduction for my tax year 2019 and pay tax on the rollover in 2020 tax year?
ANSWER:
Your understanding is correct since conversions are reported in the year the funds are actually converted/deposited to the Roth solo 401k.
