The short answer is yes. Your Solo 401k does allow for Roth contributions.
You can choose to treat contributions under your plan which would otherwise be "elective deferrals" as designated Roth contributions. In this context, an “elective deferral” is an employer contribution to your 401k plan which is excluded from your gross income.
An elective deferral is instead a designated Roth contribution if you “designate” it as not being excludable. Your designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income.
The Roth "sub-account" of the Solo 401K Plan is a hybrid of sorts. Although it is technically a type of 401k plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401k sub-account.
No employer contributions and no pretax employee contributions are permitted. The entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions.
Note: Because the Roth 401k is actually just part of a regular 401k plan, most of the rules that apply to a regular 401k plan also apply to a Roth 401k plan, including the contribution limits.
We wish! Unfortunately, the answer is no. A Roth 401k plan is only available as an option that can be added to a traditional 401k.
Distributions from a designated Roth account are excluded from gross income if they are:
However, the exclusion is denied if the distribution takes place within five years after your first designated Roth contribution to the account from which the distribution is received. Or if the account contains a rollover from another designated Roth account, to the other account.
Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.
Yes, you can. The Small Business Jobs Act of 2010, signed by then-President Obama contains a provision, which went to effect on Sept. 27, 2010. This provision allows for the conversion of a traditional 401k or 403b account to a Roth in the same plan if their employer offers one.
However, you must pay income tax on the amount converted. Let's take a look at 3 important criteria below that need to be satisfied in order for you to reap all the benefits of a Roth 401k:
All income and gains from your Roth 401k plan investment would be tax free!
Yes. You are permitted to roll over your Roth 401k plan assets into a Roth IRA. Your assets can be transferred via a direct rollover, which will avoid mandatory income tax withholdings.
No. But you can rollover assets from a Roth 401k to a Roth IRA. (Basically, you can't do the reverse.)
All distributions from Roth 401k's are either qualified distributions or non-qualified distributions.
Also, because all qualified distributions from Roth 401ks are tax-free, they are also exempt from the early distribution tax as well.
A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:
Yes, the required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401k.
If you have leftover money in your Roth 401k after your death, the distributions will be directed to your beneficiaries.
Note: The rules for a Roth 401k plan are different from those for a Roth IRA. If you have a Roth 401k, you must begin taking distributions from the account when you reach age 70 and 1/2, or after you retire, whichever comes first.
A trustee of a Solo 401k plan with a qualified Roth contribution program must establish separate accounts including only designated Roth contributions and “earnings properly [allocated] to the contributions”.
Also, the plan administrator must maintain separate records for these accounts.
Since distributions from accounts containing elective deferrals are included in the distributees' gross income, while distributions from accounts containing designated Roth contributions are generally excluded from gross income, an employee's designated Roth contributions cannot be grouped with elective deferrals.
Note: Forfeitures may not be allocated to Roth accounts.
That's all for our FAQ on the Roth option. If you have any questions about your Solo 401k plan, take our financial freedom quiz now. We're happy to help with any concerns you may have.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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