Disclaimer: This is an advanced strategy. Please proceed only under guidance and advisement from your tax professional. This article is for informational purposes only and should not be a replacement for tax advice.
There may be instances where it makes sense to convert assets to Roth, even without liquidating.
For example, if you purchased Bitcoin with pretax (traditional) 401k funds, you may decide you'd like to convert that asset to your Roth 401k. The conversion on the asset is taxable, but once converted any growth on the asset is tax free.
Before proceeding, please keep in mind converting an asset in-kind from pretax to Roth is complex. Do not proceed without guidance and oversight from your tax professional. These articles serve as a guide but the Solo401k.com team is not a replacement for tax advice.
The basic overview for an in-plan Roth conversion of assets is as follows:
Decide which asset you want to convert to Roth.
Determine the cost basis of the asset before conversion
Fill out the "In-Plan Roth Conversion Form" found in your Solo 401k plan documents zip file to document the conversion.
Consider writing a formal memo or documenting in your plan records that you have converted the asset in-kind from pretax to Roth in your Solo 401k plan.
Have your CPA and/or tax preparer calculate the tax payable on your conversion. You and your CPA will file form 1099-R in January of the following year, which documents a taxable distribution.
Most steps are self-explanatory. However, #2 bears some extra attention and that's calculating the "Cost basis" for your in-kind conversion.
Anytime you convert funds/assets to Roth, you need to know what those assets are worth at the time of conversion. This is your "cost basis". When you're converting dollars, the cost basis is easy.
If you are converting $100,000 of pretax funds to Roth, your cost basis is $100,000. You'll add $100,000 to your taxable income for the year, and pay taxes on that conversion as income.
Converting assets "in-kind" is a bit more tricky (again, work closely with your tax professional).
Cost basis for real estate:
Most CPAs will recommend getting a Broker Price Opinion (BPO) or full-blown appraisal
The idea is to get the most accurate value of the property possible
Your cost basis for the conversion uses that value with respect to determining how much you'll owe on the conversion
Cost basis for crypto:
With crypto, you can get an exact value of your account/tokens at the time of conversion
Use the value of the asset/account at time of conversion to determine your cost basis (and taxable amount)
Disclaimer: This is an advanced strategy. Please proceed only under guidance and advisement from your tax professional. This article is for informational purposes only and should not be a replacement for tax advice.