Roth Solo 401 k Rules And Its Latest Updates
Recent updates to Roth Solo 401 k regulations have taken effect in 2013. These updates improve the ability for in plan Roth conversions within the plan. This plan by Sense Financial Services is highly recommended for its tax efficiency and benefits like the ability to convert pre-tax funds to Roth.
What the new rules offer
The new rules allow the conversion of all funds within the Solo 401 k plan to Roth. Though new, this ability is still in adherence to the American Taxpayer Relief Act of 2012.
Previously, only the following funds could be converted to Roth within the plan:
- Pre-tax amounts which have been rolled over from IRAs or any other qualified retirement plans
- Salary and employer deferral contributions under qualified circumstances or events, such as the plan owner reaching 59 ½ years old
Now, with the new regulations, the following funds can also be converted to Roth within the plan:
- All contributions from profit sharing
- All employee contributions
The plan must have the ability to make in-service distributions in order to utilize the Roth conversion feature. Note that the following are still considered non-eligible distribution amounts from the Solo 401 k:
- Hardship distribution
- Required minimum distribution or RMD
- Loan considered as distribution
- Corrective distribution of deferrals or excess contributions
- Solo 401 k coverage and life insurance cost
- Substantially equal payments or distribution made per year over 10 years or a lifetime
Additional notes
Note that the re-conversion of Roth funds within the plan is not allowed, unlike the traditional IRA plan. Those who wish to convert their funds must be 100% sure that this is what they want since they cannot modify or re-convert if they change their mind. It’s always recommended to check with your CPA when deciding on how to proceed with your retirement funds.
