Designated Roth Component

Designated Roth Component

Your Solo 401k plan includes a designated Roth component. This means that if you would like to have Roth funds, you may do so within the same plan via a Roth subaccount. The process is quite simple and includes opening a separate bank or brokerage account for the Roth funds. Roth and pre-tax (non-Roth) funds should be kept separate via their respective accounts since they will be treated differently for tax purposes. Any accounts opened for Roth funds will also be titled in the name of the trust, since they are part of the same Solo 401k plan. Many banks will allow you to append a description such as “Roth” to the account name or at least provide for the ability to name accounts via online banking. This can be helpful in quickly identifying your various accounts.

Roth contribution overview:
  1. Make contributions to a separate account opened in the 401k name
  2. Enter the contribution amount as "Roth" in your records
  3. Do not claim a deduction on your taxes for the Roth contributions

Incoming transfers and rollovers:

You may transfer existing Roth 401k or other Roth qualified plan funds into the designated Roth component of your Solo 401k. You may not, however, transfer existing Roth IRA funds into the designated Roth component. This unfortunate fact is due to restrictions on Roth IRAs which can only be transferred to another Roth IRA. Designated Roth 401k funds may be transferred to a Roth IRA, however once this is done, these funds will be stuck as Roth IRA funds until distribution occurs.

Required Minimum Distributions:

Required minimum distributions (RMDs) do apply to designated Roth accounts for participants who are a 5% or more owner of the company that adopts the plan. Since the Solo 401k is an owner-only plan, RMDs will need to be taken from both pre-tax and Roth funds after age 72 (73 if you reach age 72 after Dec. 31, 2022).

In-Plan Roth Conversions:

Your plan allows for a feature known as In-Plan Roth Conversions. This provides the ability for funds that are pre-tax (non-Roth) to be converted to Roth by moving to the designated Roth component of the plan. This is a taxable event and the amount converted is treated as ordinary income. As such, one should consult with a qualified tax professional before performing this conversion. It is also important to note that the conversion is irreversible.

As the trustee of your Solo 401k, you have direct access to the 401k funds. The process for conversion includes the following steps:

  1. Make a record keeping entry for the conversion. 

  2. Move the amount you wish to convert from a non-Roth account opened for the Solo 401k trust to a Roth account opened for the Solo 401k trust. This can be done by writing a check drawn on the origin account and depositing it into the destination account or by electronic transfer such as wire or online transfer.

  3. Be sure to include the amount converted on form 1099-R. In box 7, distribution code “G” will be entered for a direct rollover. The IRS has full instructions for Form 1099-R here:

  4. If the conversion is taxable, the amount converted should also show on your individual tax return.