Updated: Apr 23, 2021
As stated on the IRS.gov website, here is some important information regarding in-plan Roth rollovers within 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, in-plan Roth rollovers, and loans per the applicable rules and limits.
For more information about Roth contributions, see our Roth FAQs Part 1 post here.
What is an “in-plan Roth rollover”?
An in-plan Roth rollover is a rollover from your account, other than an account that holds designated Roth contributions, to your designated Roth account in the same plan.
Which retirement plans may offer in-plan Roth rollovers?
Who is eligible to do an in-plan Roth rollover?
Participants, surviving spouse beneficiaries and alternate payees who are current or former spouses are eligible to do an in-plan Roth rollover in a plan offering these rollovers.
How can I do an in-plan Roth rollover?
If your plan allows them, you can do an in-plan Roth:
Direct rollover by asking the plan trustee to transfer your non-Roth amount to a designated Roth account in the same plan (in-plan Roth rollovers of amounts not normally distributable must be accomplished via a direct rollover), or
60-day rollover by having the plan distribute an eligible rollover distribution to you from your non-Roth account and then depositing all or part of that distribution to a designated Roth account in the same plan within 60 days. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control. See FAQs: Waivers of the 60-Day Rollover Requirement.
Can I recharacterize an in-plan Roth rollover?
No, you may not recharacterize an in-plan Roth rollover.
What amounts may I roll over in an in-plan Roth rollover?
If your plan allows it, you can roll over any vested plan balance, including earnings, to a designated Roth account, even if these amounts can’t be distributed to you. You can make an in-plan Roth rollover of:
matching contributions (including qualified matching contributions),
nonelective contributions (including qualified nonelective contributions),
after-tax employee contributions and
earnings on the above contributions.
The plan can specify which of these amounts are eligible for in-plan Roth rollovers and how often these rollovers can be done.
Can I get a distribution while I am still an employee (an in-service distribution) and roll over that distribution as an in-plan Roth rollover?
Your plan may limit in-plan Roth rollovers to distributable amounts. If so, your plan may allow an in-service distribution of vested amounts in your plan accounts that you may be able to roll over to a designated Roth account in the same plan. Your plan must state the rules for when you may obtain an in-service distribution.
Can my outstanding plan loan be part of an in-plan Roth rollover?
Yes. If the plan allows, you may roll over your outstanding loan balance from the plan’s non-Roth account into the plan’s designated Roth account through a direct rollover as long as there is no change in the loan’s repayment schedule. The loan’s taxable amount when rolled over as an in-plan Roth direct rollover would be the balance of the loan at the time of the rollover.
Can I borrow any amount that is part of an in-plan Roth rollover?
If your plan allows loans, you can borrow any amount that is in your designated Roth account, including amounts that you rolled over into that account as an in-plan Roth rollover.
Is income tax withholding required on in-plan Roth rollovers?
There is no income tax withholding required on an in-plan Roth direct rollover. However, if you receive a distribution from your plan, the plan must withhold 20% federal income tax on the untaxed amount even if you later roll over the distribution to a designated Roth account within 60 days. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control. See FAQs: Waivers of the 60-Day Rollover Requirement.
How are in-plan Roth rollovers taxed?
You generally include the taxable amount (fair market value minus your basis in the distribution) of an in-plan Roth rollover in your gross income for the tax year in which you receive it.
Plan sponsors shouldn’t withhold taxes from direct rollovers to designated Roth accounts, but employees who make in-plan Roth rollovers may need to increase their withholding or make estimated tax payments to avoid an underpayment penalty.
In-plan Roth rollovers are not subject to the 10% additional tax on early distributions. However, they are subject to a special recapture rule when a plan distributes any part of an in-plan Roth rollover within a 5-taxable-year period, making the distribution subject to the 10% additional tax on early distributions under IRC Section 72(t) unless:
an exception to this tax applies, or
the distribution is allocable to any nontaxable portion of the in-plan Roth rollover.
The 5-taxable-year period begins January 1 of the year of the in-plan Roth rollover and ends on December 31 of the fifth year. This special recapture rule does not apply when you roll over the distribution to another designated Roth account or to your Roth IRA, but does apply to a subsequent distribution from the rolled over account or IRA within the 5-taxable-year period.
Must my spouse consent to my in-plan Roth direct rollover?
No. A distribution rolled over as an in-plan Roth direct rollover is not treated as a distribution requiring your spouse’s consent.
Must my plan provide me notice of the in-plan Roth rollover feature?
If the in-plan Roth rollover is of an amount that could be distributed to you under the plan, then the plan must include a description of it in the written explanation (402(f) Notice) that it gives to participants who receive an eligible rollover distribution. However, no 402(f) Notice is required for an in-plan Roth rollover of an amount that couldn’t be distributed at the time of the rollover.
Source and Additional Information:
To learn more about Self-Directed Solo 401(k)s, take our course on Udemy.