Is It Possible To Reverse An In-Plan Solo 401k Roth Conversion?
The Roth Solo 401k plan is a powerful tax-planning strategy. Many investors choose to pay tax up front because they are in a lower tax bracket for the year. Others may expect to earn a significant amount from their investments. When used wisely, a Roth account can help investors shelter a large amount of earnings from taxes.
Because of the tax advantages, many plan owners are considering the in-plan Solo 401k Roth conversion.
While the conversion can be done easily, is it possible to reverse it?
What is an in-plan Solo 401k Roth conversion?
With a Solo 401k plan for sole proprietorships, a built-in Roth account is available. The maximum contribution to this Roth Solo 401k account is limited to the salary deferral portion, or $18,000 a year in 2015.
To be able to put more money into their Roth account, plan owners can take advantage of the in-plan Solo 401k Roth conversion. To do so, the plan owner will pay taxes on their regular contributions. Then they will be able to convert the pre-tax amount into their Roth account.
There is no limit on how much the plan owner can convert into Roth contributions. The converted amount will be treated as taxable income and will be taxed at the plan owner’s income tax rate.
Is it possible to reverse an in-plan Solo 401k Roth conversion?
If after the conversion, you realize that you have converted too much, or the tax payment is too high, is it possible to undo the in-plan Roth conversion?
The Internal Revenue Bulletin: 2010-51, published on December 20, 2010, provides Guidance on In-Plan Roth Rollovers. In this guidance, the answer to question 6 stated that the recharacterization of contributions only applies to contributions to IRAs.
This means that once an in-plan Solo 401k Roth conversion is completed, there will be no possible way to reverse this action. The plan owner will not be able to recharacterize their converted amount back into regular Solo 401k contributions. Doing so will be considered an operational failure because the administration fails to abide by the terms of the plan.
While the in-plan Solo 401k Roth conversion can be a powerful strategy, it can also create a large tax bill for the immediate year. The action cannot be undone. Therefore, plan owners need to understand the possible tax consequences. Discuss the matter with a professional tax accountant before making the conversion.
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