Can I recharacterize current year 401k contributions to Roth 401k contributions?

[fjordlander]

I am self-employed and have my own Individual 401k and Individual Roth 401k accounts. 

I have been contributing to my Individual 401k throughout the year. Is it possible to recharacterize (or rollover, convert, move, whatever the terminology is) some of my contributions to the 401k over to Roth 401k contributions, either (1) before the end of the year, or (2) before filing taxes next year?

I'm not talking about the entire 401k account, only some contributions from this year.

Thank you

[Anonymous_]

@Critter-3 

[Opus 17]

The expert here is @dmertz .

Recharacterization: I tend to suspect not, because that would require treating the contributions as taxable income and they would have to be added back to your W-2 income and subject to tax withholding by your employer.  401(k) plans, with or without the Roth option, are not IRAs, and are governed by different regulations, so even though they have the same overall purpose, they are very different in some other ways.   

Conversion: This is allowed by law, the question is, is it allowed by the plan?  Probably, but you have to ask.  Most plans will not allow you to withdraw money as long as you are still employed by the plan sponsor.  But a Roth conversion is not a withdrawal, it's a conversion, so it's allowed by the tax code and will probably be allowed by the fund manager.  If you have a 401(k) account from a previous employer, you are definitely allowed to withdraw, rollover or covert those funds, and you could roll them over to the current 401(k) (which is usually allowed, ask first) or you could convert them to a private Roth IRA.  

Conversions are reported for tax purposes as of the day they happen, you can't do a conversion in 2023 and call it part of the 2022 tax year.  If you want to do a conversion from pre-tax 401(k) to a Roth option 401(k) in 2022, you will want to initiate that by December 20 or so, so it has a chance to "settle" before the end of the year, given the inevitable delays around the holidays. 

[Critter-3]

Talk to your plan administrator however what you can do from now until the end of the year is make contributions only to the Roth  401K  only. 

[dmertz · Accepted solution]

Recharacterization of 401(k) elective deferrals is not permitted.  However, if your plan permits, you can do an In-plan Roth Rollover of some or all of your balance in the traditional 401(k) account to the designated Roth account in the same 401(k) plan.  The original elective deferrals you made for the year will still be excluded from box 1 of your W-2 but you'll get a code-G Form 1099-R reporting the gross and taxable amounts of the IRR.  The taxable amount will be the same as the gross amount unless you have after-tax funds in the traditional 401(k) account which would lower the taxable amount.  The taxable amount will add to your AGI.  To be 2022 income, the IRR has to be performed before the end of 2022.

Be aware that although Roth conversions from a traditional IRA are subtracted from AGI when determining your MAGI for the purpose of making a Roth IRA contribution, the taxable amount of an IRR is not subtracted.  (Of course this only matters if you make a Roth IRA contribution for the year.)

[fjordlander]

Wow, thanks for the detailed replies! To be clear, I am self-employed; I am the employer and I am the plan administrator. I set up and manage the Individual 401k through E*Trade. 

Unfortunately it seems to be structured as two separate "plans" (an Individual 401k plan and a Roth Individual 401k plan). So if it can only be an in-plan rollover I may be out of luck. I will have to talk with E*Trade I guess.

[Opus 17]

@fjordlander 

Even if you have two separate plans and can’t withdraw from one to deposit into the other, you might be able to create a new Roth option within one of those plans. As you say, it depends on how everything was set up and you need to talk to the brokerage.

[dmertz]

It seems impossible that these would be accounts under separate plans; there cannot be a Roth 401(k) that does not have a traditional 401(k) account associated with it because employer matching or profit-sharing contributions are permitted to be made only to the traditional 401(k) account, not the the Roth 401(k) account.  Review the trust agreement that you adopted when creating the 401(k) plan.

If you are eligible to take a distribution from the 401(k) plan (i.e., you are over age 59½), you also have the option to do a taxable rollover from the traditional 401(k) account to a Roth IRA.  (In this case, the taxable amount would be subtracted from AGI when determining your MAGI for the purpose of a separate Roth IRA contribution if you were to make one.)  To avoid mandatory tax withholding you need to do that rollover as a direct rollover, not an indirect 60-day rollover.