Roth Conversion from 401k while still working?

[why1942]

Hi,

I was wondering if I can start converting portions of my solo 401k (at fidelity) to my roth ira (at fidelity) while I'm still self-employed and actively contributing to my 401k? Or do I have to wait until I'm no longer self-employed, roll over the solo 401k to a traditional IRA (or another 401k with another company) and then start doing systematic conversions to my Roth IRA at that point (up to the 0% or 15% tax rate)?

Thanks,

why1942

 

[devans0]

I'm not up on self-employed rules, so I cannot comment on your question. Depending on the answers, some fall-back options could include a Roth 401K for new money? Or a Roth IRA started to get the clock ticking?

 

[why1942]

Thanks

I'm not up on self-employed rules, so I cannot comment on your question. Depending on the answers, some fall-back options could include a Roth 401K for new money? Or a Roth IRA started to get the clock ticking?

I already have a Roth IRA and plan to put as much into it as I can this year after I max out on my 401k. There is no match on the 401k, but I asked the question because I like the idea of all my retirement money being tax free. I chose to set up a solo 401k because I can put away $16500 a year instead of the tiny $5000 in a Roth IRA. Since I only make about $20k per year, and $16.5k goes into the 401k, I thought maybe I could do some small conversions from the 401k to the Roth IRA, filling up the 0% tax rate each year while I'm working and thus not paying taxes on that deferred money at all. I doubt that is this an option, but I figured I would ask.

Thanks for the comment..

 

[Koolau]

why1942

I usually go here Guide to Roth IRA, 401k and 403b Retirement Accounts when I need Roth info. It's a fair amount to wade through (so I'll let you do that) but I'm betting the answer is in here.

Good luck!

 

[devans0]

Looks like I'll be calling my plan admin to ask about about single distributions to owner and two rollovers. (#3) This is a useful link, thanks Koolau.

I wonder what happens to the tax basis if there is a loss in a downturn? There is the risk of being out of the market on a rebound and a reward of rollover to a tax free Roth future at reduced costs.

 

[Alan]

I wonder what happens to the tax basis if there is a loss in a downturn? There is the risk of being out of the market on a rebound and a reward of rollover to a tax free Roth future at reduced costs.

Not quite sure what the question is so I'll just say what happened in my situation.

I did a rollover from a 401k to an IRA. There was a very small tax basis in the 401k as almost all the money had been contributed pre-tax. On the day of the distribution my 401k provider issued a check equal to the last valuation of the investments. That check was sent to me via UPS and same day I sent it via UPS to VG. Lost a couple of days of market movements but the money in the new IRA had exactly the same cost basis as it had in the 401k.

i.e. in 1991 when I joined the company they had an after-tax savings plan and in that year I contributed ~$1,000 after tax money. The company converted the savings plan into a 401k at the end of 1991. No matter how much the market has risen and fallen that $1,000 cost basis didn't change and when it rolled over to an IRA, the accompanying 1099-R to myself and VG showed a cost basis of $1,000.


I hope this helps. This was a total rollover, I expect partials will include the appropriate fraction of the cost basis be transferred, just as partial conversions to ROTH IRAs take an appropriate fraction of the cost basis.