Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

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Topic Author
illumination
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Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Tue Oct 29, 2019 9:31 am

If you contribute to a Roth 401k and you are over 70.5 (and are self-employed) and RMDs are required, how exactly does this work? Are they only required if money is left in there?

Can you contribute to the Roth 401k and simply convert to a Roth IRA and NOT pay any RMDs, or do you contribute the amount, figure out the RMD for the year, take the RMD into taxable and then convert the rest into a Roth IRA?

What forms are filled out to show the RMDs?

I really like they idea of Roth 401k, but it seems like I keep finding new hoops that I don't fully understand.

Thanks for the help.

HomeStretch
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by HomeStretch » Tue Oct 29, 2019 9:46 am

You don’t have to take mandatory Roth 401k withdrawals at age 70-1/2 if you are still working for the employer that sponsors the plan. So it seems like this would apply to your Solo 401k plan for your business generating the self-employment income.

I don’t believe any prototype Solo 401k plan allows in-service rollovers to a Roth IRA. A custom plan (for a fee) can have that feature.

Topic Author
illumination
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Tue Oct 29, 2019 10:03 am

HomeStretch wrote:
Tue Oct 29, 2019 9:46 am
You don’t have to take mandatory Roth 401k withdrawals at age 70-1/2 if you are still working for the employer that sponsors the plan. So it seems like this would apply to your Solo 401k plan for your business generating the self-employment income.

I don’t believe any prototype Solo 401k plan allows in-service rollovers to a Roth IRA. A custom plan (for a fee) can have that feature.
I assumed the same rules were in place for Solo Traditional 401k where if you were over a 5% owner, RMDs after 70.5 were required.

So you are saying that's not the case? That would be good news.

fyre4ce
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by fyre4ce » Tue Oct 29, 2019 10:08 am

I looked into this recently and concluded that RMDs are required for a Solo 401k, both pre-tax and Roth, after age 70.5, even while working. It looks like the rules are different for Solo 401k vs. 401k at a larger employer. I concluded it might still be worth it because the RMD would effectively reduce the the contribution limit, and it would be a while before the RMD would equal the contribution limit.

HomeStretch
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by HomeStretch » Tue Oct 29, 2019 10:19 am

illumination wrote:
Tue Oct 29, 2019 10:03 am
So you are saying that's not the case? That would be good news.
No, I think you are right as I forgot about the 5% owner rule.

Topic Author
illumination
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Tue Oct 29, 2019 1:00 pm

fyre4ce wrote:
Tue Oct 29, 2019 10:08 am
I looked into this recently and concluded that RMDs are required for a Solo 401k, both pre-tax and Roth, after age 70.5, even while working. It looks like the rules are different for Solo 401k vs. 401k at a larger employer. I concluded it might still be worth it because the RMD would effectively reduce the the contribution limit, and it would be a while before the RMD would equal the contribution limit.
So did you decide to just not do a Solo Roth 401k over this?

It just seems to be something of a confusing "dance" where you put the money in, figure the RMDs, remove the funds into taxable, then convert the remainder of the Solo Roth 401k into a Roth IRA, otherwise you will continue to have to make RMDs from funds from previous year's contributions.

Obviously, if you can clear all of this out before 70.5 into your Roth IRA, it cleans a lot of this up, but after 70.5, it's a little confusing. But I guess it's along the same lines as contributing to a Traditional 401k while taking RMDs.

fyre4ce
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by fyre4ce » Tue Oct 29, 2019 1:27 pm

HomeStretch wrote:
Tue Oct 29, 2019 9:46 am
I don’t believe any prototype Solo 401k plan allows in-service rollovers to a Roth IRA. A custom plan (for a fee) can have that feature.
Do you know of any custom 401k plans that allow in-service rollovers into a Roth IRA? I think the Mega Backdoor can be done with either in-plan Roth conversions (traditional -> Roth account inside 401k), but for age >70.5 you'd have to be able to roll it out specifically into a Roth IRA.

fyre4ce
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by fyre4ce » Tue Oct 29, 2019 1:34 pm

illumination wrote:
Tue Oct 29, 2019 1:00 pm
fyre4ce wrote:
Tue Oct 29, 2019 10:08 am
I looked into this recently and concluded that RMDs are required for a Solo 401k, both pre-tax and Roth, after age 70.5, even while working. It looks like the rules are different for Solo 401k vs. 401k at a larger employer. I concluded it might still be worth it because the RMD would effectively reduce the the contribution limit, and it would be a while before the RMD would equal the contribution limit.
So did you decide to just not do a Solo Roth 401k over this?

It just seems to be something of a confusing "dance" where you put the money in, figure the RMDs, remove the funds into taxable, then convert the remainder of the Solo Roth 401k into a Roth IRA, otherwise you will continue to have to make RMDs from funds from previous year's contributions.

Obviously, if you can clear all of this out before 70.5 into your Roth IRA, it cleans a lot of this up, but after 70.5, it's a little confusing. But I guess it's along the same lines as contributing to a Traditional 401k while taking RMDs.
It's for a friend of mine. He's still deciding what he wants to do. I don't think it would be THAT complicated - it would be one contribution per year, and one RMD coming out, calculated with the December 31st balance from the previous year. At a certain point as the balance grows, RMDs will exceed allowable contributions, but at this point then he would just close down the Solo 401k and roll the whole balance over to a Roth IRA.

Normally I hate paying fees, but in this case I think it would be justified to pay for a 401k that allows in-service rollovers into a Roth IRA, so to not deal with RMDs at all. I presume, if you roll the contribution into a Roth IRA by December 31s of each year, no RMDs will be required.

Spirit Rider
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by Spirit Rider » Tue Oct 29, 2019 2:08 pm

Every mainstream low-cost prototype one participant 401k plan; E-Trade, Fidelity, Schwab, TD Ameritrade and Vanguard allow in-service withdrawals/rollovers at age 59.5. There is no need for a custom plan.

You will want to rollover the main balance at least one year prior to the year you turn age 70.5.

In the year you turn 70.5 and every year, a RMD is required before rolling over the balance. However, since the previous year's 12/31 balance will be $0, the RMD will be $0.

fyre4ce
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by fyre4ce » Tue Oct 29, 2019 3:39 pm

Spirit Rider wrote:
Tue Oct 29, 2019 2:08 pm
Every mainstream low-cost prototype one participant 401k plan; E-Trade, Fidelity, Schwab, TD Ameritrade and Vanguard allow in-service withdrawals/rollovers at age 59.5. There is no need for a custom plan.

You will want to rollover the main balance at least one year prior to the year you turn age 70.5.

In the year you turn 70.5 and every year, a RMD is required before rolling over the balance. However, since the previous year's 12/31 balance will be $0, the RMD will be $0.
How would this work for an independent contractor who is already age 72, with no retirement accounts, and is considering opening a Roth Solo 401k? Contributions this year, and every year to retirement at age ~80, would be $25k. All of the mainstream Solo 401k's (ETrade etc) allow that contribution to be immediately rolled over into a Roth IRA, such that the balance every year on Dec 31st is $0?

Edit: Obviously this plan would require opening a Roth IRA too, but that's straightforward.

Spirit Rider
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by Spirit Rider » Tue Oct 29, 2019 3:56 pm

This would work as you describe with regard to RMDs. No 12/31 balance, no RMD amount.

Topic Author
illumination
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Tue Oct 29, 2019 4:14 pm

Spirit Rider wrote:
Tue Oct 29, 2019 2:08 pm
Every mainstream low-cost prototype one participant 401k plan; E-Trade, Fidelity, Schwab, TD Ameritrade and Vanguard allow in-service withdrawals/rollovers at age 59.5. There is no need for a custom plan.

You will want to rollover the main balance at least one year prior to the year you turn age 70.5.

In the year you turn 70.5 and every year, a RMD is required before rolling over the balance. However, since the previous year's 12/31 balance will be $0, the RMD will be $0.
So this is what I was confused about.

So if you start these contributions after age 70.5 (let's just say at age 75 so there's no confusion about that unique year), if you transfer the entire balance to zero from the Roth 401k to the Roth IRA before December 31, there are no RMDs? Since the account balance was zero at the end of the the year? Do I have that correct?

Or are you "stuck" in a loop paying RMDs if you weren't at zero when you hit age 70.5?

Spirit Rider
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by Spirit Rider » Tue Oct 29, 2019 6:09 pm

The previous year-end balance determines the following year's RMD, not the current year. This is why your need to rollover the entire balance in the year before the year you turn 70.5 and then every year. Remember, what matters is the 12/31 balance, not when a given tax year's contributions are made.

Also, keep in mind the 5-year qualification status of your Roth IRAs. While it is not a problem for most people, it is better to make your first Roth IRA contribution no later than the year you turn 54.5. This gives you the most flexibility.

fyre4ce
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by fyre4ce » Tue Oct 29, 2019 6:31 pm

Spirit Rider wrote:
Tue Oct 29, 2019 6:09 pm
The previous year-end balance determines the following year's RMD, not the current year. This is why your need to rollover the entire balance in the year before the year you turn 70.5 and then every year. Remember, what matters is the 12/31 balance, not when a given tax year's contributions are made.

Also, keep in mind the 5-year qualification status of your Roth IRAs. While it is not a problem for most people, it is better to make your first Roth IRA contribution no later than the year you turn 54.5. This gives you the most flexibility.
Can you elaborate on the 5 year qualification for Roth IRAs? I know there’s a 5 year rule for inherited Roth IRAs, but is there another catch that would interfere with rollovers? My 72 year old friend currently has no retirement accounts; both the Roth IRA and Solo 401k would be opened later this year.

Thanks!

Topic Author
illumination
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Tue Oct 29, 2019 8:12 pm

Spirit Rider wrote:
Tue Oct 29, 2019 6:09 pm
Remember, what matters is the 12/31 balance, not when a given tax year's contributions are made.
So regardless of what happened in the past, if your Roth 401k balance on 12/31 is zero, no RMD is required? Do I have that right?

So if a 75 year old started this up today, made the contribution to a Roth 401k and then transferred the entire balance to a Roth IRA the next day, no RMDs would be required?

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Eagle33
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by Eagle33 » Tue Oct 29, 2019 9:42 pm

illumination wrote:
Tue Oct 29, 2019 8:12 pm
Spirit Rider wrote:
Tue Oct 29, 2019 6:09 pm
Remember, what matters is the 12/31 balance, not when a given tax year's contributions are made.
So regardless of what happened in the past, if your Roth 401k balance on 12/31 is zero, no RMD is required? Do I have that right?

So if a 75 year old started this up today, made the contribution to a Roth 401k and then transferred the entire balance to a Roth IRA the next day, no RMDs would be required?
If no Roth 401k, then no balance nor RMD this year. Then opening Roth 401k this year, contribute to 401k, rollover to Roth IRA before 12/31 this year to have zero balance on 12/31 resulting in $0 RMD for next year.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

Topic Author
illumination
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Re: Solo Roth 401k contributions after 70.5 and RMDs. How does this work?

Post by illumination » Wed Oct 30, 2019 12:11 am

Eagle33 wrote:
Tue Oct 29, 2019 9:42 pm
illumination wrote:
Tue Oct 29, 2019 8:12 pm
Spirit Rider wrote:
Tue Oct 29, 2019 6:09 pm
Remember, what matters is the 12/31 balance, not when a given tax year's contributions are made.
So regardless of what happened in the past, if your Roth 401k balance on 12/31 is zero, no RMD is required? Do I have that right?

So if a 75 year old started this up today, made the contribution to a Roth 401k and then transferred the entire balance to a Roth IRA the next day, no RMDs would be required?
If no Roth 401k, then no balance nor RMD this year. Then opening Roth 401k this year, contribute to 401k, rollover to Roth IRA before 12/31 this year to have zero balance on 12/31 resulting in $0 RMD for next year.
I guess what I was getting confused on was the 70.5 age and if the Roth 401k had to be at zero before the RMD years kicked in. That wouldn't really make sense, but the whole concept of RMDs on a Roth 401k that can be converted and avoided completely doesn't make much sense either.

Thanks

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