Only Certain Funds May Be Contributed to a Roth Solo 401(k)

Roth Solo 401k contributions became effective January 1, 2006. Only certain contribution types qualify as Roth Solo 401k contributions.

As such, before making contributions to a Roth Solo 401(k), familiarize yourself with the contribution rules.

These are the only funds that can be contributed to a Roth Solo 401k:

1. Employee salary deferrals

2. For this over age 50, Catch-up contributions

3. Automatic enrollment deferrals (only applies if full-time employees are hired and Solo 401k is therefore converted to a 401k that allows for full-time employees)

4. Rollovers from other Roth 401(k) plans

The following CANNOT be contributed to Roth Solo 401(k)

1. Employer profit sharing contributions (these can only be made to the regular Solo 401(k))

2. Forfeitures allocated to employees (these only come into play if the Solo 401k is converted to a full-time employees 401k plan)

3. Transfer or Rollovers from Roth IRAs

4. Roth IRA Conversions or other (non-Roth) employer plans

Additional items to keep in mind

1. Not all Solo 401k providers offer Solo 401k plan documents that allow for Roth Solo 401k contributions.

2. A Roth Solo 401k is not a stand-alone qualified plan.

3. A Roth Solo 401k is subject to the same rules as other 401k plans. Therefore, it must satisfy contribution and distribution rules.

3. Roth Solo 401k contributions consist of after-tax amounts. As such, when employee contributions are made, they are not tax deductible; however, the earnings grow tax free.

Example: Jane’s Smith is self-employed business is structured as a sole proprietorship and her Solo 401k plan allows for Roth Solo 401k contributions. Jane makes a salary deferral contribution amount of $ 12,000 but applies it to her Roth Solo 401k bucket; as such, she will not take a tax deduction on her personal return.

Roth Solo 401k RMDs

Just like pre-tax funds in a Solo 401k plan are subject to the required minimum distribution rules once the Solo 401k participant reaches age 70 ½, distributions from a Roth Solo 401k must commence once the participant reaches his or her required minimum distribution age. However, the Solo 401k participant can get around the RMD requirement by simply rolling his Roth Solo 401k funds to a Roth IRA since Roth IRAs are not subject to the RMD requirements. Further a qualified Roth Solo 401k rollover is not subject to taxes or penalties as long as the funds are rolled over to the Roth IRA within 60 days from the date of the Roth Solo 401k distribution.
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