Many people are not aware that is not a Roth 401K s not a new type of 401(k) Plan. Designated Roth contributions are a type of contribution that new or existing 401(k) or Solo 401K Plans can accept. If a plan adopts this feature, employees can designate some or all of their elective contributions (also referred to as elective deferrals) as designated Roth contributions (which are included in gross income), rather than traditional, pre-tax elective contributions.
With a designated Roth contribution, the employee irrevocably designates the deferral as an after-tax contribution that the employer must deposit into a designated Roth account. The employer includes the amount of the designated Roth contribution in the employee’s gross income at the time the employee would have otherwise received the amount in cash if the employee had not made the election. It is subject to all applicable wage-withholding requirements.
With a designated Roth contribution, one can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose. The Designated Roth 401K limitation is $16,500 in 2011 plus an additional $5,500 in catch-up contributions in 2011. Only 401(k) employee deferrals can be made in Roth (after-tax). A Solo 401K profit sharing contributions must be made in after-tax funds only.
As of September 2010, 401(k) or Solo 401(k) Plans that have designated Roth accounts may offer in-plan Roth rollovers for eligible rollover distributions after September 27, 2010. A Roth conversion also known as in-plan Roth rollover is essentially a distribution from your pre-tax account that is rolled over to a designated Roth account in the same plan.
You generally include the taxable amount (fair market value minus your basis in the distribution) of an in-plan Roth rollover (401K Roth conversion) in your gross income for the tax year in which you receive it. Note an in-plan Roth direct rollover is not subject to the mandatory 20% withholding. Also, in-plan Roth rollovers are not subject to the 10% additional tax on early distributions. However, they are subject to a special recapture rule when a plan distributes a portion of an in-plan Roth rollover/conversion within a 5 year-taxable period.
In the case of a Solo 401K, to effect in an in-plan Roth rollover also known as a 401K Roth conversion, the plan administrator would need to file a Form 1099-R with the IRS prior to the end of February of the succeeding year. On the 1099-R Form, the Payor would be identified as the 401K custodian and the recipient would be the Solo 401K Plan participant. For Box 7, the code to be included would be G. The individual would also have to include the total amount of the distribution and the amount of the distribution subject to tax.