New ATRA Solo 401k Plan In-Plan Roth Conversion Rules

First allowed in 2010 as part of the Small Business Jobs ACT (SBJA), the in-plan Roth conversion rules were recently updated as a result of the American Taxpayer Relief Act of 2012 (ATRA). The concept allows employees who participate in retirement accounts such as 401k plans such as a Solo 401k (a type of 401k but for the self-employed with no full-time employees besides the business owner and his or her spouse), 403(b) and governmental 457(b) plans, to convert funds from pretax funds to a Roth account without the need to participant in a Roth IRA. Note that TSP, a type of government plan, also allows for the Roth option.

Under the SBJA, participants could only make an in-plan Roth conversion if they were eligible to process a distribution from their retirement plan. As a result, not too many participants qualified for the in-plan Roth conversion. Well, the new law (ATRA) updated the rules under the SBJA by permitting participants to process in-plan conversions regardless if they are allowed to process a distribution from the Solo 401k plan, for example. The expectation is that as a result of ATRA a greater number of participants will move forward with the in-plan conversion and those existing ones to move forward with converting the rest of the previously inaccessible funds.

Who Will Process In-Plan Conversion Now?

The number of participants who will benefit from the new rule will depend on one big factor. You see, not all 401k plan providers, including Solo 401k providers, are required under the law to allow for the Roth component and therefore for in-plan conversions. Therefore, the 401k provider ultimately holds the key in the in-plan conversion process. So even though ATRA seems like a game changer, it didn’t change the fact that the 401k provider has the discretion to offer the Roth option and doesn’t always elect to do so.

If allowed, should I proceed with the In-Plan Roth conversion?

In ascertaining whether or not to covert a 401k such as a solo 401k to a Roth Solo 401k, the following 3 important questions should be answered:

Question 1: When will I need the money? If you need the money soon, it may not make sense to process a Roth Solo 401k conversion.

Question 2: Where will I get the necessary funds to pay the tax on the in-plan conversion? It’s not a good idea to use Solo 401k funds as it would be considered a taxable distribution, so plan on having outside funds to cover the taxes on the conversion.

Question 3: What do I think the tax rates will be in the future? If you anticipate being in a lower tax bracket in future years, a Roth conversion may not make sense. Conversely, it may make sense to process a Roth conversion now if you think tax rates will be higher in future years.

An In-Plan Conversion May Not be Recharacterized

The biggest con of an in-plan Roth conversion is that once it is processed you cannot change your mind and reconvert back to pretax funds. Since you cannot not undue the in-plan Roth conversion, plan ahead to make sure you have the necessary money to cover the tax on the amount converted as it will be added to your taxable income for the year. In sum, the decision to process an in-pan Roth conversion is irrevocable and so are the taxes due on the conversion.
Sabung Ayam
Kris Kristofferson

Kris Kristofferson has been making things happen his entire life. Born in Texas and raised in a military family, he was a Golden Gloves boxer who studied creative writing at Pomona College in California. The Phi Beta Kappa graduate earned a Rhodes scholarship to study literature at Oxford, where he boxed, played rugby and continued to write songs. After graduating from Oxford, Kristofferson served in the army as an Airborne Ranger helicopter pilot and achieved the rank of Captain. In 1965, Kristofferson turned down an assignment to teach at West Point and, inspired by songwriters like Willie Nelson and Johnny Cash, moved to Nashville to pursue his music. When I was in the army, I was one of the few people outside of his personal friends who knew about Willie Nelson, Kristofferson recalls. I listened to a disc jockey who happened to be a Willie fan. He would play Willies songs and talk about him all the time. By the time I got to Nashville, he was a superhero to me. For guys like me, Johnny Cash and Willie Nelson were two gods we worshipped. Then Willie and I got to be best friends. I came from a position of idolizing him to finding out hes the funniest son of a bitch you could be around. After struggling in Music City for several years, Kristofferson achieved remarkable success as a country songwriter at the start of the 1970s. His songs "Me and Bobby McGee," "Help Me Make It Through the Night," "Sunday Morning Coming Down," and "For the Good Times," all chart-topping hits, helped redefine country songwriting. By 1987, it was estimated that more than 450 artists had recorded Kristoffersons compositions.His renown as a songwriter triggered Kristoffersons successful career as a performer and that, in turn, brought him to the attention of Hollywood, leading to his flourishing career as a film actor. Kristofferson has acted in more than 70 films. In 1977 He won a Golden Globe for Best Actor in A Star Is Born. Hes appeared in cult favorites including the Blade trilogy, Lone Star, A Soldiers Daughter Never Cries, Alice Doesnt Live Here Anymore, Blume In Love, Cisco Pike, and Pat Garrett and Billy the Kid. Recent films include Fast Food Nation, Dreamer: Inspired By A True Story, The Jacket, Silver City, Hes Just Not That In To You, and Dolphin Tale.Heralded as an artists artist, the three-time GRAMMY winner has recorded 28 albums, including three with pals Willie Nelson, Johnny Cash and Waylon Jennings as part of the Highwaymen. Kristofferson has spent three decades performing concerts all over the world, in most recent years in a solo acoustic setting, which puts the focus on the songs. Theres an honesty in the sparseness. It feels like direct communication to the listener, he says. I still have more fun when Im with the band, but being alone is freer, somehow. Its like being an old blues guy, just completely stripped away.Many would have hung their hat by now. Instead, Kristofferson barely has paused for breath. Hes released several recent high watermarks including the increasingly intimate A Moment of Forever (1995), The Austin Sessions (1999) and This Old Road (2006), and he produced some of his finest work with the deeply personal Closer to the Bone (2009) and Feeling Mortal (2013). Kristofferson has reached living legend status, but that hasnt changed or hindered his creativity. His current CD, The Cedar Creek Sessions, was recorded live at Austins Cedar Creek Recording Studio in June 2014. Released in time for Kristoffersons 80th birthday in 2016, the double-CD set is a snapshot of the legendary songwriter in the twilight of his life.In addition to many other awards, Kristofferson is a member of the Country Music Hall of Fame, winner of the prestigious Johnny Mercer Award from the Songwriter Hall of Fame, and was honored with the American Veterans Associations Veteran of the Year Award in 2002. For Kristoffersons 70th birthday in 2006, his friends and admirers gifted him with a tribute CD, The Pilgrim: A Celebration of Kris Kristofferson. Stars including Willie Nelson, Russell Crowe, Emmylou Harris, Gretchen Wilson, Rosanne Cash, and Brian McKnight recorded 17 of Kristoffersons compositions for the tribute. In 2007, Kristofferson was honored with the Johnny Cash Visionary Award from Country Music Television and in 2009 BMI lauded Kristofferson with the Icon Award. He received the Frances Preston Music Industry Award from the T.J. Martell Foundation in March, 2012. In 2014, Kristofferson was honored with a GRAMMY Lifetime Achievement Award and the PEN Song Lyrics of Literary Excellence Award.