Retirement Plan FAQ: Rollovers, RMDs, Roth Conversions & Compliance (2026)

The best time for a Roth conversion is not some hypothetical future year when brackets might be higher — it is early in a profitable business, when aggressive tax planning has already compressed taxable income into unusually low brackets. Knowing when to use that window, how rollovers work, and how to handle RMDs efficiently separates strategic retirement planning from generic advice.

"The early years of business are almost never successful in terms of generating net profit. When you layer in tax planning and strategy to create more deductions so that taxable income is lowered as much as possible, you can look at doing conversion events in those years — because the marginal rates they find themselves in are going to be lower than the long-term trend."

— Neal McSpadden, Founder, Tax Sherpa

Key Takeaways

• The Roth conversion window is not about predicting future brackets — it is the moment when aggressive deductions already compress your taxable income well below your long-run earning trajectory. For new profitable businesses, that window often opens in years 1–3.
• Qualified Charitable Distributions (QCDs) are the most underused RMD tool. Up to $108,000/year goes directly from your IRA to charity, counts toward your RMD, and never touches your AGI — making itemization irrelevant.
• RMDs are calculated per person, not per account. You can satisfy the aggregate requirement by taking a larger withdrawal from a single account — just notify the other custodians.
• Rolling old W-2 401(k)s and SEP IRAs into a Solo 401(k) is almost always the right move. Consolidation preserves backdoor Roth eligibility and eliminates the pro-rata problem.
• Roth 401(k) RMDs were eliminated starting in 2024. Roth IRAs have never had lifetime RMDs.
• Self-directed plans are permissible but narrow. Real estate requires an LLC wrapper and zero personal use. Crypto adds compliance complexity that the borrow-not-sell strategy already solves outside any plan.
• Form 5500-EZ penalties run $250/day, capped at $150,000 per late return. The threshold is $250,000 in Solo 401(k) assets at year end. If you missed a filing, the DOL's DFVCP may substantially reduce the penalty.

The Roth Conversion Window: Why Early Business Years Are the Moment

Generic advice says: convert when you expect higher future brackets. Mathematically fine — but it misses the most accessible window most business owners will ever have.

In years 1–4 of a profitable business, aggressive tax planning — entity optimization, accountable plans, Section 199A, family management company payments, vehicle and home office deductions — can compress taxable income well below the owner's long-run trajectory. The business generates $200,000–$300,000 in gross profit; after the full planning stack, taxable income might land at $80,000–$100,000. The owner is in the 22% or 24% bracket. That is a temporary artifact of the planning, not a permanent condition. That gap is the Roth conversion window.

Who This Applies To

Profile: profitable business in years 1–4, active comprehensive tax planning already running, owner confident about long-run income growth. If your long-run rate is 32% and planning has placed you at 22% this year, converting traditional IRA assets to Roth at 22% is a clear win.

How to Size the Conversion

Fill the current bracket without crossing into the next. At $120,000 MFJ taxable income in 2026, the 22% bracket extends to $201,050 — converting $60,000–$80,000 of traditional IRA assets uses that room efficiently. Evaluate the 24% bracket separately against your projected long-run rate.

Rollover Decision Matrix: When to Roll, Where, and When Not To

Nontaxable Rollovers: Roll Into the Plan You Control

The pro-rata rule is the most important reason to roll SEP IRA assets into a Solo 401(k) before attempting backdoor Roth contributions. If you have $100,000 in a SEP IRA and contribute $7,500 as a nondeductible IRA contribution, the IRS pro-rates the conversion across all IRA assets — you cannot isolate the $7,500. Moving the SEP into a Solo 401(k) first clears the balance.

Taxable Rollovers: Coordinate with the Roth Conversion Window

A traditional-to-Roth conversion is a taxable event. The sizing rule: if you are typically a 32% taxpayer and find yourself in the 22% bracket this year, fill the 22% and 24% brackets via conversion. Do not over-convert into your long-run marginal rate.

When a Rollover Is a Mistake

Three scenarios where rolling is the wrong move:

1. You lose creditor protection you actually need. ERISA-qualified plans carry unlimited federal creditor protection. IRAs carry state-law protection that varies significantly. An Entity Selection Hub review is warranted before rolling a large employer plan if you operate in a liability-heavy industry.
2. You lose a loan feature you actually use. Solo 401(k)s permit participant loans; IRAs do not. Evaluate the tradeoff before initiating.
3. You trigger state tax without a plan. High-rate state residents (California, New York, New Jersey) need to account for the state income tax hit in the bracket math — 22% federal + 9.3% California is 31.3% combined, which changes the calculus on taxable conversions.

RMDs Under SECURE 2.0: Rules, the Aggregation Trick, and the QCD Strategy

Current Rules

• RMDs begin at age 73 (increasing to age 75 beginning in 2033)
• Roth 401(k): RMDs eliminated starting 2024
• Roth IRA: No lifetime RMDs — always been the case

The Per-Person Aggregation Rule

Most generic content describes RMDs as if each account has its own mandatory withdrawal. That is wrong. The RMD is calculated on the aggregate value of all traditional IRA accounts combined. You can satisfy that entire obligation with a withdrawal from one account — leaving the others untouched — provided you notify the custodians of the accounts from which you are not distributing.

Practical application: if you have three traditional IRAs and your aggregate RMD is $18,000, take the full $18,000 from the largest account. Notify the other custodians you are satisfying the RMD elsewhere. This matters for consolidation strategy and simplifies administration.

Note: the aggregation rule applies to traditional IRAs specifically. 401(k) plan RMDs must generally be taken from each plan separately.

The QCD Strategy: Why Charitably Inclined Seniors Should Not Take RMDs as Cash

A Qualified Charitable Distribution allows IRA owners age 70½ or older to transfer funds directly to a qualifying charity. The 2026 QCD limit is $108,000 per person. Three properties make it superior to taking an RMD as cash and donating:

1. The QCD counts toward your RMD
2. The QCD never enters your AGI
3. The charitable deduction is irrelevant — itemization is not required

The OBBB Act of 2025 made the enhanced standard deduction permanent ($31,500 MFJ in 2025), and added a temporary $6,000-per-person senior deduction for taxpayers 65+ (effective 2025–2028, phasing out at $150,000 MAGI for MFJ). At these levels, most seniors cannot clear the itemization threshold — charitable cash donations generate zero federal tax benefit.

A QCD eliminates the problem at the source. For a couple in the 22% bracket donating $30,000/year via QCD, the tax savings versus the cash-donate approach is roughly $6,600. Neal's framing: "It's more efficient to do a QCD rather than taking the RMD and then trying to deduct a charitable contribution."

Self-Directed Solo 401(k): What Is Actually Permissible

Real Estate: LLC Wrapper Required, Personal Use Prohibited

Real estate can be held inside a Solo 401(k) with the right structure: the plan owns an LLC, and the LLC owns the property. Zero personal use — not a vacation home, not a property where a family member lives below market. Any personal use triggers the self-dealing prohibition under IRC Section 4975, which can cause plan disqualification and immediate taxation of the entire account balance.

Neal's practical caveat: real estate already has tax advantages outside a retirement plan — depreciation, leverage, and tax-free borrowing against equity. Adding a plan wrapper introduces compliance overhead that may not generate proportional tax benefit.

Cryptocurrency: The Custody Problem

Crypto can theoretically be held inside a self-directed plan, but the custody question is ambiguous for on-chain assets. There is no centralized ledger linking wallet addresses to plan entities. More practically, the borrow-not-sell strategy already solves the tax problem without a plan wrapper. Neal's take: "The simple thing is just never sell. You just borrow against positions and that creates usable funds without generating taxable events." For exchange-held crypto, the custody question is cleaner — but the tax argument for a plan wrapper weakens when you are not planning to sell anyway.

ROBS: A Cautionary Note

Rollover as Business Startups is a legal strategy allowing an individual to roll a 401(k) into a newly formed C-Corporation that then funds a business startup. When set up correctly it works — but the ongoing compliance burden is significant: annual corporate formalities, proper payroll, legitimate business activity, prohibited transaction avoidance.

Neal's general position: most people do not have the operational discipline to maintain the structure correctly over a 5–10 year horizon. The alternative — SBA loans, equity investors, traditional bank lines — does not put retirement assets at operational risk and does not create a compliance structure that can quietly fail. Consider ROBS only with a very specific client profile and ongoing qualified advisory support.

Form 5500-EZ: The Filing Most Solo 401(k) Owners Miss

When Solo 401(k) plan assets exceed $250,000 at plan year end, a Form 5500-EZ must be filed by July 31 of the following year (October 15 with extension). This is an informational filing — it creates no tax liability — but the penalty for failing to file is $250 per day, capped at $150,000 per late return.

Most major custodians (Fidelity, Schwab, Vanguard) flag this requirement in year-end account statements. If you have a self-directed Solo 401(k) with a smaller administrator, the responsibility is yours.

If you crossed the threshold and did not file: the DOL's Delinquent Filer Voluntary Compliance Program (DFVCP) substantially reduces the penalty — typically to a flat fee of $250 per return, capped at $750 per plan for multiple years. Engage it before the IRS or DOL contacts you.

2026 Contribution Limits: Quick Reference

Compensation cap (IRC §401(a)(17)): $360,000 across all plan types.

Roth catch-up rule (effective 1/1/2026): Employees with prior-year wages above $145,000 must make all catch-up contributions as Roth. Applies to multi-participant plans; Solo 401(k) owners who are the sole participant are effectively outside the scope of current IRS guidance.

Can You Contribute to Two Plans in the Same Year?

Technically yes, but the employee deferral limit ($24,500 in 2026) is a global per-person cap, not a per-plan cap. If you contribute the full $24,500 to one plan, you cannot make additional employee deferrals to a second plan. Employer contributions have their own separate cap and are not affected.

The scenario where this arises: a mid-year plan switch — terminating a SIMPLE IRA and establishing a Solo 401(k) in the same calendar year. Both are possible, but the combined employee deferral across both plans cannot exceed the annual limit. For most business owners, the better mental model is an annual evaluation: pick the right plan, fund it fully, review at year-end.

The Two Rules That Actually Determine Retirement Outcomes

Neal has observed thousands of clients move through earning careers into retirement. His observation: "By the time they get into retirement age, relatively few of them are able to make retirement contributions work."

A nurse he describes had $80,000 annual income and $120,000 accumulated in a 403(b). Retired, did not adjust lifestyle, cashed out over two years. Empty. Living on Social Security and family support. The plan worked. The behavior didn't.

Two rules determine whether any retirement structure actually produces a retirement:

1. Put enough in. Plan type matters less than contribution rate. A fully-funded Solo 401(k) outperforms an underfunded defined benefit plan every time.
2. Leave it alone. Early withdrawals, unpaid loans, and job-transition cashouts are more destructive than any plan design choice.

Retirement is the last step in the tax planning stack. Entity structure, deduction optimization, and the S-Corp compensation strategy create the income capacity that makes meaningful contributions possible — but only if the contributions go in consistently and stay.

Need Help With Retirement Planning?

Tax Sherpa helps solopreneurs and small business owners navigate contribution limits, rollovers, RMDs, and Roth conversions as part of a full tax strategy.

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