Here are some answers to frequently asked questions about our Solo & Company ROTH 401k plans:
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Q: Are Required minimum distributions required from a ROTH 401k account?
A: Yes, unless you are still working and a less than 5% owner.
Q: What is the maximum I can contribute as an employee each year?
For 2011: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $16,500) as an ROTH employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in the relevant tax year) can contribute up to 100% of their earnings not to exceed $23,000) as an ROTH employee contribution to their 401k plan.
Only if you have established a separate designated "ROTH 401k" account you may divide the total employee contribution (plus the "catch up") between the ROTH 401k account and the traditional pre-tax 401k account in any percentage you choose. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. You may not exceed the total of $16,500 ($23,000 if age 50 or older) between both the traditional pre-tax 401k account and the ROTH 401k account. You may not make an employer contribution or employer profit sharing or employer matching contribution to the ROTH 401k account.
Q: May I make employer matching or profit sharing contributions to my ROTH 401k account?
Q: How do I report to the IRS the ROTH 401k contributions I make as an employee each year?
A: Employee Pre-Tax (not ROTH) contributions are totaled and inserted on line 28 of your own personal 1040 form. You may not take a tax deduction for the amounts contributed to the ROTH 401k account.
Q: Since designated Roth contributions are already included as part of wages, tips & other compensation on the Form W-2, must the amount contributed as designated Roth contributions be identified on the Form W-2 as well?
Yes, contributions to a designated Roth account must also be separately reported on Form W–2, “Wage and Tax Statement,” in accordance with the W2 instructions. The Act requires separate reporting of the yearly designated Roth contributions. Designated Roth contributions to 401(k) plans will be reported using code AA in box 12.
Q: When do I have to make my ROTH 401k contributions by?
A: For Solo 401k plans only (defined as 401k plans with no non-owner employees and consisting of just a business owner and/or their spouse), you may contribute both the employee contribution (including ROTH contributions) and the employer contribution (profit sharing) up until the filing of your tax return.
For Sole Proprietors, including single member disregarded LLC's, sponsoring Solo 401k plans (as defined above) and filing a personal tax return (Form 1040 with Schedule C), the deadline for both the employee contribution (including ROTH contributions) and the employer contribution is therefore April 15th per I.R.C. §404(a)(6) (or later if an extension is filed).
For S-Corporations (and LLC's taxed as corporations) sponsoring Solo 401k plans (as defined above) and filing a corporate tax return (Form 1120 or 1120S) the deadline is therefore March 15th per I.R.C. §404(a)(6) (or later if an extension is filed).
All employee salary deferrals (including ROTH contributions) for "Company Plans" (401k plans with at least one non-owner employee or consisting of any 401k participant other than just a business owner and/or their spouse) have to be contributed to the plan as soon as they can be reasonably be segregated from the company's general assets and in any event no later than 15 business days after the end of the month in which the contributions would have been paid to the employee in cash if not withheld from wages. [DOL Regulation §2510.3-102(a)].
Generally speaking employer profit sharing contributions for both "Company Plans" and "Solo Plans" can be made up to the filing of the tax return (including extensions).See I.R.C. §404(a)(6).
Q: May I take a loan from my ROTH 401k account?
A: Yes, you may borrow from either your Pre-tax account or your ROTH account. Loans are available at all of our custodians up to 50% of the account balance not to exceed $50,000. The interest rate is a commercially reasonable rate. Rates considered reasonable by the Department of Labor range from a certificate of deposit rate plus 2% to the prime rate plus 1%. The rate is fixed and fully amortized. (Under our 401k program, you can have no more than two loans outstanding at any one time.) General purpose loans have a 5 year repayment period while loans for the acquisition of a primary residence can have a longer repayment period. A plan loan must be repaid within five years unless the loan is used, within a reasonable period of time, to acquire a principal residence of the participant.
A so-called principal residence loan need not be secured by the participant's principal residence to satisfy the requirements. (A refinancing generally cannot qualify as a principal residence plan loan. Refinancing, second homes and investment property have 5 year repayment terms.) However, a loan from a plan used to repay a loan from a third party will qualify as a principal residence loan [Treas. Reg. 1.72(p)-1.]
Q: Is the consent of my spouse required to take out a loan from my ROTH 401k?
A: For plan loans over $5,000 (from plans which are subject to the spousal annuity requirements), the spouse must give written consent within 90 days prior to the date the loan is made. Treas. Reg. 1.401(a)-20, Q&A 24(a) (1).
Q: How frequently must the ROTH 401k loan repayments be made by law?
A: 401k loans require repayments to be made at least quarterly. IRC Section 72(p)(2)(C). If a loan does not call for at least quarterly payments, the entire loan is deemed a distribution at the time the loan is made. Treas. Reg. 1.72(p)-1.
Q: Who do I pay the interest on the ROTH 401k loan to?
A: You pay it back into your own 401k account and you keep it.
Q: Is the interest on the ROTH 401k loan tax deductible?
A: No. The interest paid is generally nondeductible. (However, if the loan is secured by a participant's principal residence, the interest is deductible as long as the participant is not a key employee. I.R.C. §72(p)(3). Key employees are officers with annual compensation in excess of $130,000, a more than 1% owner with annual compensation in excess of $150,000 or a more than 5% owner).
Q: Does 401kBrokers.com charge an additional fee for taking a loan from a ROTH 401k account?
A: No.($0 setup and $0 each year the loan remains outstanding).
Q: Does a loan from my ROTH 401k account appear on my credit report?
A: No. "The consumer is borrowing his or her own money, and the loans are not reported to the credit-reporting agencies," says David Rubinger, vice-president of communications for Equifax, one of the major credit bureaus.
Q: I will be 70 1/2 this year, it is my understanding that as long as I still continue to work I do not have to start the required minimum distribution (RMD) from my ROTH 401k account this year and can continue to make contributions to my Solo 401 K yearly as long as I continue working. Is this correct?
A: In a company 401k setting where you are an employee who owns less than 5% of the company this would be true, (the "Required Beginning Date" [for required minimum distributions or "RMD's"] means the later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2 or retires). However for ROTH 401k accounts, benefit distributions to a more than 5% owner must commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2. You may continue to make contributions to your ROTH 401k plan from earned income even if you are taking RMD's.
Q: Can I have a workplace or company 401k and my own Solo ROTH 401k plan at the same time?
A: Yes you can. The contributions to your Solo 401k will be based on your self-employment income and not on income earned as an employee of another company. However, the two plans are treated as one for purposes of determining your maximum contribution limits. You may not defer more than $15,500 (2007) into both plans combined.
For example, you may not defer the maximum as an employee at work ($15,500 in 2006) and then another $15,500 into your Solo ROTH 401k as an employee of your own company. If you defer (contribute) say $6,000 as an employee at work, you can defer (contribute) up to $8,000 as an employee into your Solo 401k (as long as you have earned income from self-employment of at least that amount).
Q: Can I have a Solo ROTH 401k account and a traditional IRA at the same time?
A: Yes you can. However, the two are related in that if you are an active participant in a qualified plan (say, for example, a Solo 401k plan) limits are placed on the amount of a contribution to a traditional IRA that is deductible. For single individuals and heads of households, the part of the contribution to a traditional IRA that is deductible phases out ratably if MAGI is more than $45,000 and less than $55,000 in 2004. In 2005, it phases out ratably if MAGI is more than $50,000 and less than $60,000. However, the amount deductible will be at least $200 if the MAGI is less than the high end of the phase out range.
Q: Can I have a Solo ROTH 401k account and a ROTH IRA at the same time?
A: Yes you can. The two are unrelated. They each have their own contribution conditions and limits and contributing to one does not reduce the contributions you can make to the other. The citation for this authority is a telephone message left on our voice mail on 2-21-2007 at 9:52 a.m. by Don Curlzyk of the IRS, in response to an email we sent to email@example.com. Mr. Curlzyk's telephone number is 513-263-3573.
Q: Can I have a SEP-IRA and a Solo 401k with a ROTH account feature at the same time?
A: Yes you can but the two plans are treated as one for purposes of determining your maximum contribution limits. Since the Solo 401k allows for greater deductions on less income, having both may not make the most sense. Further, according to Mr. Boldragini ID#31-08350 of the IRS if you want to have both a SEP-IRA and a Solo 401k, you may not contribute to both in a given tax year unless you used a plan document other than the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP"). You must have used a prototype plan document or an individually designed plan document for the SEP-IRA, which allows for multiple plans and apportionment and aggregation of contributions. However, you do not need to terminate the SEP-IRA in order to open or maintain a Solo 401k, (you simply cannot contribute to the SEP-IRA in the same tax year as your contributions to a Solo 401k). You can keep an existing SEP-IRA dormant (no contributions) alongside a Solo 401k. (This true even if the dormant SEP-IRA is the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP").
Q: Can I have a SIMPLE-IRA and a Solo 401k plan with a ROTH account feature at the same time?
A: No you may not. Because SIMPLE plans often have exclusive plan rules, they are generally not allowed alongside a Solo 401k. However, you can easily terminate your SIMPLE plan and start and contribute to a Solo 401k for this year. Here's how the IRS says to terminate the SIMPLE...
Q: Can I roll a SIMPLE-IRA into a Solo ROTH 401k account?
A: No, but you may roll it into a 401k Pre-Tax account. IRS Publication 590, a copy of which you can obtain here, says on page 100:
"After the two year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax sheltered annuity plan (Section 403(b), or deferred compensation plan of a state or local government." (emphasis added). Since a Solo 401k plan is a "qualified plan", so yes you can roll a SIMPLE IRA into a SOLO 401k after two years.
Q: Will distributions from Roth IRAs satisfy the distribution requirements applicable to IRAs or 403(b) accounts or contracts and vice versa?
Distributions from Roth IRAs (defined in section 408A) will not satisfy the distribution requirements applicable to IRAs or section 403(b) accounts or contracts and distributions from IRAs or section 403(b) contracts or accounts will not satisfy the distribution requirements from Roth IRAs.
Q: I have had a Roth 401K for 2 years now. I'd like to rollover a small portion of that fund to a Roth IRA in my portfolio to enable me to balance. Can I do that?
A: No, in order to roll out the money from the ROTH 401k to the ROTH IRA, you will need to have had it in the plan for at least 5 years and be over the age of 59.5.
Q: Can distributions from a designated Roth account be rolled over to a designated Roth account of another employer or into a Roth IRA?
The proposed regulations provide that if the portion of a distribution from a designated Roth account under a plan qualified under section 401(a) that is not includible in income is to be rolled over into a designated Roth account under another plan, the rollover of the distribution must be accomplished through a direct rollover (i.e., a rollover to another designated Roth account is not available for the portion of the distribution not includible in gross income if the distribution is made directly to the employee) and can only be made to a plan qualified under section 401(a) which agrees to separately account for the amount not includible in income (i.e., it cannot be rolled over into a section 403(b) plan).
If a distribution from a designated Roth account is made to the employee, the employee would still be able to roll over the entire amount (or any portion thereof) into a Roth IRA within 60 days of receipt. Under section 402(c)(2), if only a portion of the distribution is rolled over, the portion that is rolled over is treated as consisting first of the amount of the distribution that is includible in gross income. Alternatively, the employee is permitted to roll over the taxable portion of the distribution to a designated Roth account under either a section 401(a) or 403(b) plan within 60 days of receipt. In addition, the employee’s period of participation under the distributing plan is not carried over to the recipient plan for purposes of determining whether the employee satisfies the 5-taxable-year requirement under the recipient plan.
Q: How is the 5-taxable-year period calculated in the case of a rollover of a distribution from a designated Roth account maintained under a section 401(k) or 403(b) plan to a Roth IRA?
The proposed regulations provide that in the case of a rollover of a distribution from a designated Roth account maintained under a section 401(k) or 403(b) plan to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count towards the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if an individual had established a Roth IRA in a prior year, the 5-year period for determining qualified distributions from a Roth IRA that began as a result of that earlier Roth IRA contribution applies to any distributions from the Roth IRA (including a distribution of an amount attributable to a rollover contribution from a designated Roth account).
Q: Are there any examples to help explain the rollover rules?
Yes, the following examples from the proposed regulations under Section 402A illustrate the rollover rules.
Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B’s designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B’s gross income.
Employee C receives a $12,000 distribution, which is a qualified distribution that is attributable to the employee being disabled, from C’s designated Roth account. Immediately prior to the distribution, the account consisted of $21,850 of investment in the contract (i.e., designated Roth contributions) and $1,150 of income. For purposes of determining recovery of investment in the contract, the distribution is deemed to consist of $11,400 of investment in the contract [$12,000 × 21,850/(1,150 + 21,850)], and $600 of income [$12,000 × 1,150/(1,150 + 21,850)]. Immediately after the distribution, C’s designated Roth account consists of $10,450 of investment in the contract and $550 of income. This determination of the remaining investment in the contract will be needed if C subsequently is no longer disabled and takes a nonqualified distribution from the designated Roth account.