Transfer Between Roth and Pretax Account in Same Year

Submitted by Joe Linck on Sat, 2018-10-27 16:19

During 2018, I’ve made deferrals into my Roth account inside of my solo 401(k) plan, and now realized because of the new 20% deduction rules, I’d be better off tax-wise to have the deferrals transferred to my Pre-Tax account, and treated as Pre-Tax deferrals. So, if I now transfer the full $24,500 from my Roth account to the Pre-Tax account I will treat the $ 24,500 as a Pre-tax deferral on my 2018 tax return. Any problem with this? Do I have a problem because the money first went into my Roth account? Thank you!



Submitted by Alan - IRA critic on Sat, 2018-10-27 17:51

Unfortunately, unlike a regular IRA contribution an elective deferral to an employer plan cannot be recharacterized to a different type of deferral. If your plan allowed IRRs (in plan Roth rollovers) you could roll pre tax deferrals to the designated Roth, but you cannot do the reverse after making the Roth deferrals. Sounds like your QBI deduction is in the phaseout range due to the Roth contributions not reducing your taxable income.

Submitted by Joe Linck on Mon, 2018-10-29 13:07

Thank you for your response and your right about QBI deduction.    A little more to the situation.  I file a schedule C, and I don’t have a deferral form completed.  I complete the deferral form at the end of the year (by 12/31), and designate whether roth or pretax for my files, and file tax return accordingly.  So don’t believe I’m recharacterizing it.  It won’t be characterized as roth or pre-tax until 12/31……….Does this change your thinking on this?      

Submitted by David Mertz on Mon, 2018-10-29 16:52

  • A designated Roth account is maintained as a separate account within the 401(k) plan and the nature of the contribution, traditional or Roth, is determined by the account to which the deposit is made, not by anything you later put on a deferral form.  The deferral form is to be prepared prior to making the deposit; it’s the instruction to the employer (yourself as self-employed) as to what employee contribution to make and in which account to deposit the contribution.
  • Since your deposits were made to the designated Roth account, they are irrevocably Roth contributions.

Submitted by Joe Linck on Mon, 2018-10-29 22:11

Thanks DMx (and Alan) . Your comments are helpful, and believe you got me to the correct research material.  Section 1.401(k)-1(f), in part, says only designated Roth contributions can be made to a designated Roth account.  Designated Roth contributions have three requirement, one of which for self-employed individuals is that the individual does not claim a deduction on his (her) tax return.   Consequently, merely putting the deferral into a designated Roth account doesn’t make it a designated Roth contribution.  The Regs also require the Roth deferrals be irrevocably designated as Roth deferrals, which mine weren’t (I was to complete form by 12/31).   … So seems that I’m required to remove the money from the Roth account because the deferrals were not designated Roth deferrals.   ….. Interestingly, Q&A 13 of 1.402A-1 says within a plan you can not transfer money from “other accounts” (e.g. pre-tax accounts) to a designated Roth account, which makes sense because otherwise taxpayers could take deductions and later move to Roth account.  However, it doesn’t prohibit from Roth to Pre-Tax, which also makes sense because that would only harm a tax-payer (except for my unusual situation which affects income taxes). It shouldn’t make a difference whether I withdraw the deferral from the Roth account and re-defer to Pre-tax, or simply transfer to Pre-tax account.  The error made, is argueably, I should have had a pre-tax elective deferral form in place prior to deferring the money to the plan during the year…. On that thought, maybe I should withdraw the money (as required), and re-defer as pre-tax deferral via an election form……….Your thoughts and comments are much appreciated.

Submitted by Alan - IRA critic on Mon, 2018-10-29 18:18

I agree. As a Sch C filer, you would typically make your 2018 contributions in 2019, either by 4/15 if you do not need an extension or by 10/15 if you file a timely extension. Therefore, the contribution would usually be made after you have all other tax data for 2018, but once you actually make the deferral into the pre tax or Roth accounts in the plan, they cannot be changed.  In other words, do not make deferrals until you have your entire tax picture in 2019.

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