Since the inception of the Solo 401k (often referred by other names such as owner only 401k, self-employed 401k or self-directed 401k) in 2002 with the passage of EGTRRA, owner-only businesses have consistently switched from participating in SIMPLE IRA to Solo 401k.
However, one should consider the following before making the switch from a SIMPLE IRA to a Solo 401k or self-directed 401k to stay in compliance with the regulations:
Cease making contributions to SIMPLE IRA
If you currently participate in a SIMPLE IRA, not only must you first cease making contributions to it but also not have made contributions to it in the year that you would like to rollover the SIMPLE IRA to the new Solo 401k. In addition, you cannot make future contributions to the SIMPLE IRA while the solo 401k is active.
Daniel has been contributing to her SIMPLE IRA for the last four years, including this year, but recently read how a Solo 401k will allow her to put way more for retirement. However, because Daniel contributed to her SIMPLE IRA this year, she must wait until next year to transfer her SIMPLE IRA to a Solo 401k, provided she establishes the Solo 401k by December 31 of this year.
2 Year Period to avoid 25% penalty
Before you proceed with rolling over your SIMPLE IRA to a Solo 401k, first confirm that it has been at least two years since you first contributed to it. Reason being, you will be hit with a 25% distribution penalty on the amount of the rollover if you rollover the SIMPLE IRA before the two year period has expired.
QUESTION: I’ve had my SIMPLE IRA for more than 2 years. Can I transfer it to a solo 401k plan?
ANSWER: YES you can transfer the SIMPLE IRA to the solo 401k plan since you have had the SIMPLE IRA for more than 2 years. See the following regulation: [I.R.C. 408(d)(3)(A)(ii); 408(d)(3)(G)]
QUESTION: I’ve received the rollover check from my Edward Jones SIMPLE IRA and deposited into my Schwab pre-tax brokerage account. I just want to confirm that, per our conversation last week, no other action is required on my part at this time to complete the rollover. Next year, I just need to confirm that I receive a 1099R from Edward Jones with code “G” indicating that the SIMPLE was rolled over to a qualified account. Is that correct?
ANSWER: Yes, that is correct as a code “G” communicates to the IRS that the SIMPLE IRA funds were directly rolled over to the solo 401k plan.