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If you have a solo 401k and are thinking of changing providers, you probably have some questions. Do I need to notify the IRS? Will it complicate my taxes or reporting requirements? This article will explain what’s involved when you switch solo 401k providers and whether you need to report the change to the IRS.
It’s common for solo 401k owners to consider upgrading their retirement plans. As your business grows and becomes more profitable, you may want to take advantage of improved solo 401k features and higher contribution levels. Additionally, doing so now allows you to qualify for the $1,500 start-up tax credit. Whether seeking enhanced plan options, greater contributions, or a tax break, you may look at switching solo 401k providers by re-stating your existing plan.
Reasons to Consider Switching Solo 401k Providers
- Limited investment options (e.g. the plans offered by discount brokerages like Fidelity, Schwab, E-Trade, etc. don’t allow for alternative investments with checkbook control like real estate, notes, precious metals, private placements, crypto, etc.)
- Looking for a plan that allows Solo 401k participant loans (i.e. up to 50% of the balance not to exceed $50,000)
- Limited contribution options (e.g. your plan may not allow for Roth or Mega Backdoor Roth Solo 401k contributions)
- $1,500 Solo 401k tax credit (i.e. the plans offered by the discount brokerages like Fidelity, Schwab, E-Trade, etc. don’t allow you to claim $1,500 in tax credits)
Does the IRS Need to Know if I Switch Providers?
The short answer is no – you do not need to notify the IRS if you transfer your solo 401k from one provider to another. As long as you directly roll over the funds, it is not a taxable distribution. Essentially you are changing the plan provider, not transferring the funds to a different plan or retirement account.
Be sure to clearly document the transfer for your records. Your new solo 401k provider will need information about the original establishment date and details to setup the account properly. But the IRS does not need to be informed each time there is a change in Solo 401k plan provider.
The Takeaway on Changing Solo 401k Providers
At our firm, we help clients every day upgrade their solo 401k plans to take advantage of more features, better investment options, higher contributions, and a $1,500 Solo 401k tax credit for switching to our plan.
We leverage all of this experience to make the process of upgrading to our plan a smooth and quick process. For example, when restating a basic solo 401k plan at a discount brokerage the funds and investments can be kept at the pre-existing brokerage. Moreover, changing Solo 401k plan providers is neither taxable nor reportable: the IRS does NOT need separate notification about solo 401k plan provider changes.
