Roth FAQs Part 1: Making Designated Roth Contributions to a Self-Directed Solo 401(k)

As stated on the IRS.gov website, here is some important information regarding Roth contributions to a Solo 401(k). Since these Q&As are on the IRS’s website, they are applicable to several types of employer-sponsored retirement plans, so keep in mind that “employer” and “employee” both refer to the account holder when attributing the information to Self-Directed Solo 401(k) plans. Also, at Nashional Self-Directed, our plans automatically allow for Roth contributions and in-plan Roth rollovers, per the applicable rules and limits.

Look for our Roth FAQs Part 2 post here.

What is a designated Roth contribution?

A designated Roth contribution is a type of elective deferral that employees can make to their 401(k), 403(b) or governmental 457(b) retirement plan.

With a designated Roth contribution, the employee irrevocably designates the deferral as an after-tax contribution that the employer must deposit into a designated Roth account. The employer includes the amount of the designated Roth contribution in the employee’s gross income at the time the employee would have otherwise received the amount in cash if the employee had not made the election. It is subject to all applicable wage-withholding requirements.

The law does not allow designated Roth contributions in SARSEP or SIMPLE IRA plans.

Can I make both pre-tax elective and designated Roth contributions in the same year?

Yes, you can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose.

Is there a limit on how much I may contribute to my designated Roth account?

Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under IRC Section 402(g)). The limit is $19,500 in 2020 and 2021 ($19,000 in 2019), plus an additional $6,500 in 2020 and 2021 ($6,000 in 2015 – 2019) if you are age 50 or older at the end of the year. These limits may be increased in later years to reflect cost-of-living adjustments.

Can I make age-50 catch-up contributions as a designated Roth contribution to my designated Roth account?

Yes, provided you are age 50 or older by the end of the year and the plan permits these contributions.

Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?

Yes, for 2020 and 2021, if you are age 50 or older, you can make a contribution of up to $26,000 to your 401(k), 403(b) or governmental 457(b) plan ($19,500 regular and $6,500 catch-up contributions) and $7,000 to a Roth IRA ($6,000 regular and $1,000 catch-up IRA contributions) for a total of $33,000. Income limits apply to Roth IRA contributions, however.

When must I be able to elect to make designated Roth contributions?

You must have an effective opportunity to make (or change) an election to make designated Roth contributions at least once during each plan year. The plan must state the rules governing the frequency of the elections. These rules must apply in the same manner to both pre-tax elective contributions and designated Roth contributions. You must make a valid designated Roth election, under your plan’s rules, before you can place any money in a designated Roth account.

Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?

No, there are no limits on your income in determining if you can make designated Roth contributions. Of course, you have to have salary from which to make any 401(k), 403(b) or governmental 457(b) deferrals.

Can employers allocate plan forfeitures to designated Roth accounts?

Employers can only allocate designated Roth contributions and rollover contributions (and earnings on these contributions) to designated Roth accounts. The employer may not allocate forfeitures, matching or any other employer contributions to any designated Roth accounts.

Can I change my mind and have designated Roth contributions treated as pre-tax elective contributions?

No. Once you designate contributions as Roth contributions, you cannot later change them to traditional, pre-tax elective contributions.

Can a plan offer only designated Roth contributions?

No, in order to provide for designated Roth contributions, a plan must also offer traditional, pre-tax elective contributions.

Can a plan automatically enroll me to make designated Roth contributions if I fail to decline participation?

Yes, a plan can provide that your employer will automatically withhold elective deferrals from your pay unless you decline participation. If the plan has both traditional, pre-tax elective contributions and designated Roth contributions, the plan must state how the employer will allocate your automatic contributions between the pre-tax elective contributions and designated Roth contributions.

Can I make a designated Roth contribution for my spouse if my spouse has no earned income, as permitted with a spousal IRA account?

No. Although you can contribute to a traditional or Roth IRA for your spouse based on your earned income, you cannot contribute to a Roth 401(k), Roth 403(b) or Roth governmental 457(b) for your spouse.

If my only participation in a retirement plan is through non-deductible designated Roth contributions to a designated Roth account, can I make a deductible IRA contribution regardless of my income, or do the active participant rules apply?

You can contribute to a traditional IRA (up to the maximum IRA dollar limits) regardless of whether or not you are an active participant in a plan. However, when determining whether you can deduct a contribution to a traditional IRA, the active participant rules under IRC Section 219 apply. You are an active participant if you make designated Roth contributions to a designated Roth account. As such, your ability to deduct contributions made to a traditional IRA depends on your modified adjusted gross income.

Source and Additional Information:

Retirement Plans FAQs on Designated Roth Accounts | Internal Revenue Service (irs.gov)

To learn more about Self-Directed Solo 401(k)s, take our course on Udemy.