The self-directed solo 401k generally will need to be closed down once you permanently stop performing self-employment activity at least on a part-time basis.  If the solo 401k holds a promissory note investment, this alternative investment may be directly rolled over in-kind (i.e., you won’t have to liquidate the investment) to a self-directed IRA by assigning note investment from the solo 401k to the self-directed IRA.

Here are the steps involved in transferring solo 401k owned promissory investments to a self-directed IRA:

First, open a self-directed IRA with a custodian that allows for promissory notes in an self -directed IRA.

Second, determine the fair market value (FMV) of the solo 401k owned promissory note which can be coordinated with the borrower.

Third, complete the self-directed IRA custodians transfer form where you will list the promissory note to be transferred in-kind from the solo 401k to the self-directed IRA.

Fourth,  work with the promissory note borrower to update their investment note offering documents to reflect the self-directed IRA as the new owner of the shares/units.

Fifth, provide the self-directed IRA custodian with the promissory note investment documents reflecting the self-directed IRA as the new owner/investor as, an officer of the IRA custodian will need to sign the change in ownership forms and then subsequently books the investment in their IRA custodial records.

Reporting to the IRA the transfer of the Solo 401k including the promissory note to the Self-Directed IRA

When a solo 401k is transferred to a self-directed IRA, required IRS reporting applies including the issuance of a Form 1099-R and final Form 5500-ez. While not all self-directed solo 401k plan providers will provide solo 401k closing reporting services, My Solo 401k Financial does provide this service for timely requests and is included in their annual fee.

A Final Form 1099-R is Required

A Form 1099-R is used to report the non-taxable direct rollover of the solo 401k to the self-directed IRA. For client’s of My Solo 401k Financial, click here to complete our on-line form used to collect the necessary information to issue the Form 1099-R to report the non-taxable direct rollover of the solo 401k funds including the promissory to the self-directed IRA. Make sure to complete this online form by 12/31 as the Form 1099-R gets issued by January/February of the year following the movement of the solo 401k to the IRA.

A Final Form 5500-EZ

Regardless if the solo 401k value was over or under $250,000 at the time the self-directed solo 401k was transferred to the self-directed IRA, the IRS requires the filing of a final Form 5500-ez to formally close the solo 401k plan.