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What Types of 401(k) funds Can be Converted to a Roth Solo 401(k)?

On November 26, 2010, the IRS issued Notice 2010-84 containing guidance for 401(k) and 403(b) plans about in-plan Roth rollovers – a feature that permits plan participants to roll over eligible rollover distributions (ERDs) made after September 27, 2010, from a non-Roth account into a designated Roth account in the same plan. A non-Roth account means any plan account that does not hold designated Roth contributions.

In sum – the determination of whether a Roth 401(k) rollover is permitted is based on whether the funds were a 401(k) rollover, employee deferral, or employer profits sharing contribution.

Rollover funds – A Roth 401(k) rollover into the 401(k) Plan can be converted to a Roth sub-account anytime since there are no restrictions for rollovers. In other words, because rollovers can be distributed anytime – there is a distribution default trigger that allows rollovers to be converted to a Roth 401(k).

Employee deferrals: Under most Solo 401(k) Plan documents, employee deferral contributions are not permitted be rolled into Roth sub-account until the plan participant reaches the age of 591/2. The reason for this is that since a Roth conversion is treated as a distribution, the plan documents must allow for a distribution in order to effect a conversion. However, because most Solo 401(k) plans require the plan participant to have at least reached age of 591/2 for doing a distribution, any plan participant under the age of 591/2 will not be able to convert employee deferrals to a Roth 401(k) because no distribution trigger event could occur.

Employer profit sharing contributions: Under most Solo 401(k) plan documents, employer profit sharing contributions can be rolled into a Roth sub-account if the plan participant has been in the plan for over 5 years. If the plan participant has been a participant of the plan for less than five years, then he or she must wait two years before doing a rollover to a Roth 401(k)

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Posted in Solo 401(k)

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