Solo 401k After-Tax Contributions and In Plan Roth Conversion
A 55-year-old solo entrepreneur has filed a 2023 extension. He wants to max out his Solo401k contribution and take advantage of the plan’s after-tax contribution and In Plan Roth 401k conversion.
Must he max out all pre-tax contributions (deferral and profit sharing) before making any after-tax contributions? For example: if Schedule C Net Income is 100,000, the deferral is maxed at 30,000 (22,500 + 7,500 catchup). If the maximum contribution for 2023 is 73,500, can he max the after-tax contribution at 43,500 and convert to ROTH? Or would he first need to max out the profit-sharing contribution before he can do any after-tax contribution and In Plan ROTH conversion?
If the after-tax contribution is converted to ROTH 401k on the same day, is it subject to a 5-year clock for withdrawal? If the ROTH 401k is rolled into a ROTH IRA would it be considered part of that ROTH IRA’s existing 5 year clock?
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2024-05-02 14:51
Pre tax or Roth deferrals need not be maxed out prior to making after tax contributions if the plan provisions allow after tax contributions. However, if total contributions get too close to the 73,500 defined contribution limit, there will be no room left for the profit sharing contribution.
If the AT contributions are immediately rolled to the Roth account, effectively there is no 5 year holding requirement since the 10% penalty only applies to the taxable portion of that rollover, which will be 0 or near 0.
With respect to the 5 year holding period for Roth IRA earnings to be qualified at 59.5, time in the Roth 401k cannot be considered and the Roth IRA itself must be held 5 years. But for the other 5 year conversion holding period for any taxable conversions in the plan or Roth IRA, that 5 years from the year of he in plan conversion continues to run if the Roth 401k is rolled over to a Roth IRA, but all such 5 year periods automatically end at 59.5.
Permalink Submitted by Jerry Matecun on Fri, 2024-05-03 03:45
Thank you Alan. One clarification please. If the after-tax contribution is converted immediately to the ROTH 401k, there is no 5 year clock within the plan. Got it. But what if this is then rolled into a ROTH IRA? Is it then subject to that ROTH IRA’s existing clock?
Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2024-05-03 16:25
No, the 5 year conversion clock will not apply to the Roth IRA either because the in plan rollover was not taxable.