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Gains from aftertax account counts towards the contribution limit?
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2 Replies
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Hello,
When you are doing in-plan conversion from voluntary aftertax solo401k acccount to Roth solo401k account? Do the gains from aftertax account count towards solo401k contribution limit? It’s like $30 from money market funds while the money was being processed. I want to avoid the situation of “over-contribution”
Thank you
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No, those would be simply gains or increases in value and *not* contributions. Therefore they do not cause an over contribution situation. However, those gains are taxable when converted to Roth. So when you make the conversion the contribution portion (let’s say $20,000) is not taxable since it was after-tax already but the gains ($30) are taxable. Those $30 should show up as a taxable amount on the 1099-R associated with the conversion and therefore when you eventually file your tax return you will pay taxes on that small “income”.
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Gains such as the $30 earned from the money market fund while the funds were in the voluntary after-tax Solo 401k account do not count toward the Solo 401k contribution limit. The IRS contribution limits apply only to the actual contributions made based on self-employment income and not to the investment gains earned within the plan.
These gains are treated as taxable income when converted to the Roth Solo 401k account via the in-plan Roth conversion process, or to a Roth IRA. They are reported on Form 1099-R.
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