Folks this option has been around for a while and it worthy of consideration. It is not new (2010), and for those that are will to pay Uncle Sam his share of the taxes, it is a great way to “get” more Roth dollars into your plan.
Your Plan Must Permit!
Just because this is permitted within any 401(k) plan, including a Solo-K, the sponsored plan documents must stipulate the ability to do so, and the plan documents must be included in the plan.
PGI’s documents can include the Roth-conversion provision, but it is included in the plan upon request. Unlike the ability to make contributions are an automatic feature to our plans, the Roth-conversion amendment must be requested to be added.
Think Roth “Rollover”
While you are “converting ” funds within the plan to Roth dollars, a better visual may be to consider this akin to “rolling over” the funds to Roth. Why? The conversion is a movement of funds (e.g., rollover) that are distributed from the pre-tax account they are being held into a separate Roth account within the same plan (yes, you must keep the funds in a separate account as part of the Solo-K).
Basic Steps to Correctly Accomplish the Roth “Rollover”/Conversion
- Make sure your plan document sponsor has the ability to include the Roth Conversion/Rollover as part of their plan documents. Again, if the plan documents do not stipulate that you can, it does not matter if the IRS rules permit. You have to comply with the provisions of your plan. As noted, PGI can execute a Roth conversion for your plan, upon request.
- Include the taxable amount of the in-plan conversion/rollover in your gross income for the tax year in which the conversion occurs.
- This rollover is not otherwise subject to the mandatory 20% withholding requirement otherwise applicable to similar 401(k) rollovers.
- The Roth conversion/rollover is not subject to the 10% additional tax on early distributions (you are not moving funds away from the plan, just elsewhere within the plan. Please note: any distributions of these now-converted Roth funds within 5 years subjects the funds to a special recapture rule.
- The plan administrator (Trustee) would file a 1099-R with the IRS prior to the end of February for the succeeding year in which the Roth conversion/rollover occurs. The 1099-R is provided to both the IRS and the participant (in a Solo-K, typically you and, potentially, you and spouse).
- The Payor on the 1099-R form will be the plan and the recipient, as noted, would be the participant.
- With regard to Box 7, the code you would want to enter is “G”. This informs the IRS that this transaction is a non-taxable rollover. On the 1099-R you will also identify the total amount of the distribution and the amount of this distribution that is subject to being taxed (presumably, the numbers will be the same).
- Probably most importantly…review this transaction with your tax professional. They are best suited to make sure this transaction goes off without a hitch, you pay Uncle Sam his due and you report it correctly!
As always this information is intended to be educational in nature. It is not intended, nor should it be considered any form of tax, legal, financial or investment advice.