Establishing a solo ROTH 401k for a 72 year old
When establishing a solo ROTH 401k for a 72 year old for a more than 5% business seems to have an inherit challenge. The participant has to do a RMD. However, the participant has not held the account for 5 years causing the 10% IRS penalty on the growth. I have not found anywhere for this to be an exception to this rule. Any thoughts?
Is one possible solution to set up a traditional solo 401k, take a RMD, do a direct rollover, then convert to a ROTH IRA?
Permalink Submitted by David Mertz on Mon, 2021-01-11 16:44
There is no early-distribution penalty after age 59½ regardless of how long the account has been in existence; being age 59½ or over at the time of the distribution is an exception to that penalty. However, the proportionate amount of earnings in the RMD from the Roth 401(k) that must be part of the distribution will be subject to income tax until the 5-year holding period for the Roth 401(k) have been met.
A rollover from the Roth 401(k) to a Roth IRA that would allow RMDs to be avoided can only be done after first satisfying the RMD for the Roth 401(k) for the year.
If there was a $0 balance in the Roth 401(k) at the beginning of the year such that there is no current-year RMD for the Roth 401(k), amounts in the Roth 401(k) can be rolled over to a Roth IRA before year-end to avoid RMDs.