Solo 401(k) Roth Conversion | Ed Slott and Company, LLC

Solo 401(k) Roth Conversion

I have a client that funded a solo 401k with both deductible and nondeductible employer contributions. For simplicity, let's assume the deductible contribution was $11k and the nondeductible contribution was $26k. Can he convert solely the nondeductible contribution amount to a Roth IRA and leave the deductible contribution amount in the solo 401k (i.e. not impacted by pro rata rule)?

Usually the after tax contributions are made into a separate sub account which also includes the earnings on those contributions. As a separate account, it can often be distributed while the solo K is still active. However, the plan document prevails so client will have to check with the administrator or plan document. If allowed, the earnings on the non deductible contributions are usually small enough to roll to a Roth IRA even though taxes would be due on those earnings. But if the earnings have been allowed to accumulate in the sub account, a split direct rollover could be considered sending the after tax amount to the Roth and the earnings to a TIRA.

  • An 401k participant can make; traditional (pre-tax) deferrals, Roth (post-tax) deferrals and employee after-tax contributions. Deferrals to a designate Roth account are not universal and employee after-tax contributions are only available from non-mainstream one-participant 401k plan document providers and/or TPAs.
  • On the other hand, legitimate 401k employer contributions are always pre-tax. 401k non-deductible employer contributions are a 401k plan error, subject to a 10% excise tax and must be resolved under the IRS Employee Plans Compliance Resolution System (EPCRS).
 

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