Roth Solo 401k

The Roth Solo 401k is a new salary deferral option. Below are some facts and rules.

1) The 2012 Roth Solo 401k contribution limit is $17,000 or $22,500 if age 50 or older.

2) Roth Solo 401k contributions are made after-tax and are not tax deductible.

3) Roth Solo 401k distributions are received tax free from federal income taxes provided there is both a 5-year holding period AND there is a qualifying event. The 5-year holding period begins with the first contribution to a Roth 401k account and there are 3 qualifying events: the attainment of age 59 ½, disability or death.

Roth Solo 401k rules

1) After-tax contributions cannot be combined with pre-tax contributions. As a result, within your Solo 401k there will be two separate accounts; one account will be designated for after-tax Roth contributions, the other for pre-tax contributions such as the profit sharing portion of your Solo 401k. You will need to segregate tax deductible versus non tax deductible (Roth) account activity when reporting to the IRS.

2) Roth 401k accounts from a previous employer can be rolled over to a Roth Solo 401k. If rolled over to a Solo 401k, the 5-year holding period begins with the earlier of the date the rolled over account was established, or the date the receiving Roth account was established.

3) Roth Solo 401k accounts can be rolled over to a Roth IRA or to another identically designated  Solo Roth 401k. Otherwise the previously untaxed earnings will be treated as an early distribution from a qualified plan (liable for taxes and penalties for any such early distribution) unless you have had this Roth account established for more than five years.

Learn more about the Roth Solo 401k.