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An Overview of the Solo 401(k) Plan Roth In-Plan Rollover

For the past few years, plans with designated Roth accounts could allow an individual to roll over an amount from a non-Roth account into the individual’s designated Roth account in the same plan, but only amounts the individual could have had distributed from the plan, usually because the individual had attained age 59½ or had severed from employment.

Beginning in 2013, a 401(k) plan can permit this type of rollover for an amount that is not eligible for distribution at the time of the rollover, such as an amount in an individual’s regular (pre-tax) elective deferral account when the individual is not eligible for a distribution from that account. The Roth in-plan rollover rules also apply to Solo 401(k) plan employer profit sharing contributions which are made in pre-tax and can be immediately converted to a Roth plan account without any plan triggering event. The amount of the Roth conversion is treated as income and subject to tax, but there is no 20% withholding on the Roth conversion amount.

American Taxpayer Relief Act of 2012

A similar expansion applies to 403(b) plans and governmental 457(b) plans. The amendment to the in-plan Roth rollover rules was made by the American Taxpayer Relief Act of 2012. The purpose of the relaxation of the in-plan Roth rollover rules is to encourage plan participants to do Roth conversions which brings in immediate tax revenue to the Treasury. In light of the recent financial difficulties in the economy, Treasury has had s tough time bringing in the amount of tax revenues needed and there hope is that encouraging plan participants to do in-plan Roth conversion will help Treasury add the needed tax revenues.

To learn more about the in-plan Solo 401(k) Plan Roth rollover rules, please contact a retirement tax specialist at 800-472-0646.

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Posted in Solo 401(k)