Roll solo Roth 401(k) to Roth IRA

Submitted by Christina Eckhoff on Sat, 2019-09-28 15:12

My husband is a sole practitioner who turned 67 in 2019. He will turn 70 in March 2022. He has a solo 401(k) and a solo Roth 401(k) (opened in 2013) at institution A, and a Roth IRA (backdoor) at institution B. He stopped making contributions to the Roth 401(k) after 2016. He is his own plan administrator and needs a valid reason such as attainment of Normal Retirement Age or Termination of the Plan to roll the Roth 401(k) to a Roth IRA. We are not sure what Normal Retirement Age is (66 for social security)? He does not want to terminate the entire plan because he would like to make contributions to the solo 401(k) through 2021. He would to know if he can avoid taking RMDs from the Roth 401(k) by rolling it into a Roth IRA? He would like to hold the final combined Roth IRA at either institution A (to stay in funds that institution B cannot hold) or at institution C (where most of his other investments are held). The Roth IRA was funded as a After-Tax Traditional IRA in 2009, 2010 and 2011 and converted to a Roth IRA in 2016 with backdoor contributions made for 2016-2018. He has not yet made his 2019 backdoor contribution because of not knowing the answers to the questions below.
Questions are: 1) If he rolls the Roth IRA from institution B to another institution will the contributions still maintain their character for the 5 year no-tax rule even though they are at a different institution with a different account number or does the Roth IRA have to remain at institution B? 2) If the first Roth IRA needs to stay at institution B can he open a second Roth IRA at either institution A or C in 2019 to start a new five year clock? 3) Will the Roth 401(k) funds take on the age character of whichever Roth IRA they are rolled to? 4) If he rolls the Roth 401(k) to a Roth IRA at institution A or C (with the Roth IRA opened in 2019) when should he do this? 5) If he waits until 2022 would he have to take an RMD from the Roth 401(k) first?



Submitted by Alan - IRA critic on Sat, 2019-09-28 16:00

  1. Q 1) The date of the first Roth IRA contribution for purposes of the 5 year holding period remains regardless of change of custodians or even closure of the entire Roth, and starting contributions again later. His Roth IRA is now qualified and completely tax free.
  2.  Q 2) Not applicable per above. His Roth IRA is qualified including any new accounts he would choose to open.
  3.  Q 3) When Roth 401k funds are rolled into any qualified Roth IRA, they become immediately qualified as well, even if the Roth 401k was not yet qualified. Therefore, rolling the Roth 401k into a new or existing Roth IRA does not matter, the entire Roth balance will be qualified.
  4.  Q 4) He can only do an inservice distribution when the Roth 401k adoption agreement allows. These are not standardized agreements. He has satisfied any IRS age requirements, so needs to check the adoption agreement. If he qualifies for in service distribution, he can do this whenever he wishes, however would have to do the rollover before the year he reaches 70.5 in order to avoid 401k RMDs up to an including the year of the direct rollover.
  5.  Q 5) Yes, if 2022 (or earlier) is the year he will reach 70.5.
  6.  He must terminate the solo K within a year after ending business activity, and file a 5500 EZ.
  7. Once the funds are in the qualified Roth IRA, any tax free distributions can be reported directly on line 4a of Form 1040. Form 8606 is not required when the Roth is qualified.
  8. If for some reason he still has a 401k balance in the 70.5 year, IRS RMD rules allow him to aggregate his RMD for the plan between the Roth and pre tax balance. Therefore, he would have some control over the amount of taxable income resulting from the RMDs.

Submitted by David Mertz on Sat, 2019-09-28 16:17

Alan, I think it was said that his first Roth IRA was established with a Roth conversion in 2016.  Assuming this to be the case, the 5-year period for qualified Roth IRA distributions will not be completed until the end of 2020.  Because the Roth 401(k) is qualified (first contribution in 2013), any amounts rolled over from the Roth 401(k) to the Roth IRA become contribution basis in his Roth IRAs.

Submitted by Alan - IRA critic on Sat, 2019-09-28 17:07

Agree. I picked up 2009 instead of 2016 for first Roth contribution.

Submitted by Christina Eckhoff on Mon, 2019-09-30 18:02

Thank you so much for the speedy reply and comments.  The information is very helpful and I will proceed with confidence! 🙂

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