BACKGROUND & QUESTIONS
Our little company has lost money in both 2018 and 2019, which precluded us from making any additional contributions to our Solo 401k accounts.
We would like to roll over our current Solo 401k funds into a Roth Solo 401k plan. All of our current Solo 401k funds were pre-tax contributions. We understand there will be a tax hit in making the conversion.
We have a few questions:
1. Does our business have to have to be generating a profit at the time that we make the conversion election?
2. We incurred significant investment losses earlier this year; both short term and long term capital losses. Can those losses be used to offset the gain associated with making the Roth conversion, or can we only use ordinary losses of which we have none. I am assuming the later.
3. How do we calculate the potential tax liability for the conversion? Is it as simple as the value of the 401k accounts on the date of conversion, less our basis in the accounts, then taxes at our current income tax rates for ordinary income this year?
ANSWERS:
1. As long as you are performing self-employment activity at least on a part-time basis whether it leads to profit or not, you can continue to participate in the solo 401k plan including processing in-plan conversions.
2. Plan conversions are subject to earned income tax rates in the year of the conversion (i.e., the year the funds or assets are converted).
3. If you are converting non-liquid assets (e.g., physical real estate), you will need to first get the property appraised by a third party and taxes at the earned income tax rates will be due on the appraised value when you file your personal tax return Form 1040 by April 15 following the year in which the conversion occurred.
4. If you convert liquid assets (e.g., publicly traded stocks) the closing stock value on the date the stock is converted in-kind to the Roth solo 401k holding account is the value that will be subject to taxes at the earned income tax rates.
Our little company has lost money in both 2018 and 2019, which precluded us from making any additional contributions to our Solo 401k accounts.
We would like to roll over our current Solo 401k funds into a Roth Solo 401k plan. All of our current Solo 401k funds were pre-tax contributions. We understand there will be a tax hit in making the conversion.
We have a few questions:
1. Does our business have to have to be generating a profit at the time that we make the conversion election?
2. We incurred significant investment losses earlier this year; both short term and long term capital losses. Can those losses be used to offset the gain associated with making the Roth conversion, or can we only use ordinary losses of which we have none. I am assuming the later.
3. How do we calculate the potential tax liability for the conversion? Is it as simple as the value of the 401k accounts on the date of conversion, less our basis in the accounts, then taxes at our current income tax rates for ordinary income this year?
ANSWERS:
1. As long as you are performing self-employment activity at least on a part-time basis whether it leads to profit or not, you can continue to participate in the solo 401k plan including processing in-plan conversions.
2. Plan conversions are subject to earned income tax rates in the year of the conversion (i.e., the year the funds or assets are converted).
3. If you are converting non-liquid assets (e.g., physical real estate), you will need to first get the property appraised by a third party and taxes at the earned income tax rates will be due on the appraised value when you file your personal tax return Form 1040 by April 15 following the year in which the conversion occurred.
4. If you convert liquid assets (e.g., publicly traded stocks) the closing stock value on the date the stock is converted in-kind to the Roth solo 401k holding account is the value that will be subject to taxes at the earned income tax rates.
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