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Solo 401k Roth FAQ: The value of my Solo 401k is down – Can I convert to Roth Solo 401k?
QUESTION:
My Solo 401k investment which was purchased with pre-tax Solo 401k went down in value. Can I convert that asset using its current lower value to the Roth Solo 401k and have all the possible future earnings on it be tax-free?
RESPONSE:
Good question as one of the most popular reasons that clients open solo 401k plans with us is the ability to have Roth Solo 401k funds and investments.
Yes, it is possible to transfer assets in-kind from the pretax solo 401(k) subaccount to the Roth solo 401(k) subaccount. It is noteworthy that there’s no triggering event requirement so one can transfer as much or as little as they want.
Of course, a pre-tax solo 401k to Roth solo 401k transfer is both taxable and reportable. We have an online form that our Solo 401k clients us to let us know about the conversion so that we can capture the information that is needed to prepare the required 1099-R.
In the event that the Solo 401k owner/participant transfers an asset in-kind (as opposed to a conversion of cash), the Solo 401k owner/participant would need to let us know about the value at the time of the conversion as this value will be used to determine the taxable amount. This means that if the Solo 401k investment has lost value because if the present fair market value is less than the amount invested, the taxable amount will be the lower present fair market value at the time of the Pre-tax to Roth Solo 401k conversion. Moreover, any subsequent gains with respect to the investment that accrue after the conversion to the Roth Solo 401k sub-account would accrue on a tax-deferred basis and be tax-free if at the time of the distribution from the Roth Solo 401k sub-account one is able to take a qualified Roth Solo 401k distribution (i.e. the Solo 401k owner/participant has had the Roth solo 401(k) account for at least five years and is at least 59 1/2 years of age at the time of the distribution).
