As Roth 401k including Roth solo 401k contributions have greatly increased over the past 5 years, a common question that arises is when does the 5 (five) year holding period commence so that qualified Roth solo 401k contributions can be made.
Compliance Note: the following two requirements must be satisfied in order for a Roth solo 401k distribution to be deemed “qualified.”
- you must be age 59 1/2 or older;
- and must have had the Roth solo 401k for 5 years.
The Start Date of the 5 Year Roth Solo 401k Holding Period
The 5 year Roth solo 401k holding period starts on January 1 of the year for which the Roth solo 401k was contributed for.
Example 1: Janice is self-employed and her LLC is taxed as an S-corporation. Janice has had a solo 401k since 2019 but has never made any Roth solo 401k contributions to the plan. She makes her first Roth solo 401k contribution on March 10, 2022 and treats the contribution as being made for the 2021 tax year since she is making the contribution before the due date (March 15) of her self-employed business tax return. As a result, her Roth solo 401k 5 year holding period started on January 1, 2021.
Example 2: As in the above example, Janice has had a solo 401k since 2019 but has never made any Roth solo 401k contributions to the plan. She files a business tax return extension to file her business taxes by the extended deadline of September 15, 2022 since her LLC is taxed as an S-corporation. She then contribute to her Roth solo 401k for the first time on June 18, 2022 and treats the contribution as having made for tax year 2021. As a result, her Roth solo 401k 5 year holding period started on January 1, 2021.
Example 3: Same as above, Janice has had a solo 401k since 2019 but has never made any Roth solo 401k contributions to the plan. She DID NOT file a business tax return extension for her LLC which is taxed as an S-corporation. She make a Roth solo 401k for the first time on October 5, 2022. She will need to treat the contribution for 2022 NOT 2021 since she did not file a business tax return extension for her 2021 tax year. As a result, her Roth solo 401k 5 year holding period started on January 1, 2022 NOT 2021.
Compliance Note – Just One 5 Year Holding Period: Only one 5 year period applies to the Roth solo 401k and it begins with the year the first Roth solo 401k contribution was applied to. Therefore, in examples 1 and 2 above, Janice locked her Roth solo 401k period staring in 2021 even though she made her first Roth solo 401k contributions in 2022. Why? Because she made the contributions prior to her business tax return due date including her business tax return extension.
Compliance Note – Only to the Solo 401k Plan Not Other Plans: Don’t confuse the Roth IRA 5 year holding period with the Roth solo 401k holding period. Unlike the Roth IRA where the 5 year holding period commences when you first contributed to ANY Roth IRA even if you have opened multiple IRAs in the past, the Roth 401k holding period DOES NOT apply on plan-by-plan basis. For example, if you have a Roth 401k with your day-time employer and also have a Roth solo 401k, you cannot apply the 5 year holding period form one plan to the other.
Other Methods of Starting the 5 Year Roth Solo 401k Holding Period
Transfer form Outside Plan: The 5 year Roth solo 401k holding period can also be started by transferring funds from another Roth 401k (e.g., a former employer Roth 401k, Roth 403b or Roth 457b).
In-Plan Roth Solo 401k Conversion: If your solo 401k plan allows for in-plan Roth conversions, this is another method for starting the 5 year Roth solo 401k holding period. An in-plan Roth solo 401k conversion entails converting pretax solo 401k or voluntary after-tax solo 401k funds to the Roth solo 401k designated account.
