Solo Roth 401-K plan
My daughter has a solo counseling business and files her taxes through Schedule C. She has been contributing the maximum allowed for her Roth IRA for the last 5 years. We read that the IRS is now allowing Solo 401-K plans (both traditional as well as Solo Roth 401-K plan). Either of these will allow her to save more for her retirement than she can now with a Roth IRA by contributing a larger amount as an employee as well as an employer. I have two questions regarding these two plans.
How are the two plans treated when the time comes for distribution. Are the employee and the employer contributions plus their earnings segregated by the Plan Administrator and taxed differently during its distribution or are the contributions plus earnings aggregated and the entire amount treated as a tax free distribution in the case of the Solo Roth 401-K and taxable for the Solo 401-K?
Am I correct in that if she enrolls in a Solo Roth 401-K plan, the employee portion is an after tax contribution and obviously not tax deductible and that the employer portion of the contribution is not a business expenditure but is an adjustment subtracted from her total taxable income. (Sched.1, Line 16 in the Form 1040).
Does her 5 year participation in the Roth IRA fulfill the requirements for the Solo Roth 401-K?
Thanks for your help and guidance.
Permalink Submitted by Alan - IRA critic on Mon, 2024-05-06 21:09
The 5 year holding periods for a Roth 401k and a Roth IRA to be qualified are separate.
Yes, a pre tax employer contribution is reported on Sch 1, line 16. It’s unlikely that Roth employer contributions are yet available from solo K providers.
If pre tax and Roth contributions are made to a plan, it must separately account for the balances in each account and the elective deferrals (employee contribution) balance in each account as well as the amount of employer contributions. Few plans would allow separate investment choices between the pre tax and Roth sub accounts. Distributions from the pre tax sub account will be taxable, and from the Roth portion will be taxable to the extent of investment gains until the Roth 401k is qualified. Roth IRAs have more favorable distribution rules (ordering rules) than a Roth 401k prior to qualification.