LLC for Solo 401k & Ultimately Transfer the Solo 401k LLC to a Self-Directed IRA LLC

One option if you are no longer self-employed, or if you no longer qualify for a solo 401k plan because your business has grown resulting in hiring a full-time or multiple full-time W-2 employees, is to invest the solo 401k funds in  single member LLC where the solo 401k is the sole member of the LLC.

Invest the solo 401k in an LLC

The solo 401k will get invested in an LLC (a.k.a. solo 401k LLC), with the existing solo 401k funds and assets deposited into the solo 401k LLC.

Transfer the solo 401k LLC in-kind to a Self-Directed IRA

Once the solo 401k LLC is setup and the existing  funds and assets in the solo 401k plan have been deposited into it, we will help you to close down the solo 401k plan including transferring the solo 401k owned LLC in-kind to a self-directed IRA.
Our LLC services also cover the following services.
  • Registration of LLC (note that our $800 fee does not cover the LLC registration fee charged by the  secretary of state)
  • Obtaining EIN for the  LLC
  • Preparing the Solo 401k LLC Operating Agreement
  • Update of LLC operating agreement to list the self-directed IRA as the member
To get started, please provide the following:
To form LLC and Prepare LLC Operating Agreement, we require the following information from you:

LLC Business Name (please provide 3 names in case name is already taken):

The name must contain the words limited company or limited liability company or the abbreviation L.C., LC, L.L.C. or LLC.

  • LLC Name Preference 1:
  • LLC Name Preference 2:
  • LLC Name Preference 3:

LLC Manager’s Address (generally your home address):

  • Physical Address (cannot be a PO Box):
  • LLC Manager’s name (your name):
  • Registered Agent name (this is usually you):
  • Registered Agent’s phone number:
  • Registered agent’s address:

Transfer Self-Directed Solo 401k to a Self-Directed IRA

Once the owner-only business owners ceases self-employment activity, resulting in having to close down the solo 401k plan, an option is to transfer the plan to a self-directed IRA.

Following are the  ultimate steps that apply when closing a solo 401k plan by transferring/rolling it over to a self-directed IRA.  By transferring the solo 401k plan to a a self-directed IRA, you can continue investing in alternative investments such as real estate, notes and metals, to name a few.

First: Open a Self-Directed IRA

If you don’t already have a self-directed IRA, open one with  a self-directed IRA custodian such as Forge Trust Company. The IRA can generally be opened on-line.

Second: Determine if Just Cash or Assets Will Be Transferred

If the solo 401k plan also holds alternative investments such as real estate and notes, they can be transferred in-kind to the self-directed IRA with the help of the new IRA custodian.

Third: Complete the On-Line Full Transfer/Rollover Form

The self-directed solo 401k provider will need to issue a Form 1099-R to report the non-taxable transfer of the solo 401k and its assets to the self-directed IRA. For My Solo 401k Financial clients, the following form is used:


Form 1099R

The solo 401k provider will report the direct rollover from the solo 401k to the IRA on Form 1099-R. A 1099-R is a required document that must be completed and sent to the IRS for all distributions, including non-taxable direct rollovers to a TRADITIONAL IRA from a Solo 401k plan. The 1099-R will be issued in February of the year following the transfer, with a copy sent to you for filing with your taxes and a copy sent to the IRS. IMPORTANT: The direct rollover is not taxable only re-portable IF the funds are transferred to a TRADITIONAL IRA.

Form 5500ez

By February of the year following the transfer to the IRA, the solo 401k provider will issue a final Form 5500ez to formally report the closure of the solo 401k plan to the IRS.

Moving the funds from the Solo 401k to the Self-Directed IRA

If by Check:

  • Make the FULL transfer check from the PRETAX solo 401k account payable in the name of the new IRA custodian F.B.O. your name.
  • List the IRA account number and write “Full Solo 401k Direct Rollover to Pretax IRA” on the memo section of the check.

If Electronically:

  • You may also have the bank or brokerage form holding the solo 401k funds move the funds electronically such as by wire to your Pretax IRA.

If an alternative investment such as real estate is being transferred from the solo 401k (in-kind transfer) to your pretax IRA, make sure to first get the property valued /appraised to ensure the correct amount transfer amount is reported on Form 1099-R to the IRS, and you will need to have the property assigned/deeded from the solo 401k to the IRA. If real estate, You will need to contact the county recorder to have this done.

Items to Consider Before Processing a Conversion of Pretax Self-Directed Solo 401k funds to a Roth IRA

Are you considering converting your traditional (pretax) solo 401k to a Roth IRA in 2021?

Consider the following before proceeding:

The 2021 December 31 Deadline

The deadline for a 2021 Roth conversion is December 31, 2021. This means that the funds and/or assets must be deposited from the solo 401k pretax bank/brokerage account to the Roth IRA account by 12/31/2021 in order to count for the 2021 tax year.

Plan for Taxes

The conversion of pretax solo 401k funds to a Roth IRA will trigger taxes at earned income tax rates, and state taxes may apply depending on your state of residence.  The Roth conversion income will increase your ordinary income for 2021 – potentially causing the loss of exemptions, credits tax deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums – but this only happens for the year of the conversion. The trade-off is that all future qualified distributions from your Roth IRA will be distributed completely tax-free.

Reasons to Proceed with the Roth Conversion 

If you choose to proceed with the Roth conversion, here factors to consider. Some factors in favor of converting include not needing your money soon, or even at all and expecting your future tax rates to be higher. Being younger can favor conversion as younger people generally are in a lower bracket, have not yet accumulated large sums in their solo 401k, and have long retirement savings timelines to work with.

Reasons not to Processing a Conversion

Conversion may make sense for some but is not for everyone.   A conversion may not be right for you if:

are older and will need the money soon;

you think you will be in a lower tax bracket at retirement; and

not having available, non-retirement assets to pay the tax due on the Roth conversion.

No Do Over

Just like Roth solo 401k conversions, you cannot change your mind once the Roth IRA conversion has been processed.

IRA Conversion & IRA Recharacterizations Differences

The IRA conversion and IRA recharacterizing rules can be easily confused. Following are the differences between these two IRA transactions.

What is a conversion?

A conversion occurs when IRA funds including assets (e.g., real estate, IRA owned LLC, notes, and even equities) are moved from a Traditional IRA, SIMPLE IRA, and SEP IRA to a Roth IRA. The IRA participant has the option to convert the IRA funds (assets and cash) directly or indirectly to the Roth IRA.

If done directly: the IRA custodian moves the funds and or assets directly to the Roth IRA.

If done indirectly: the IRA custodian distributes the funds and/or assets directly to the IRA participant resulting in the funds being deposited into the participant’s personal bank account and the assets get assigned in the participants personal name as well. The IRA participant then has 60 days to convert the funds and/or assets to the Roth IRA. This is the least favorable way to process a Roth IRA conversion because of the increased steps and deadline restriction.

More IRA Conversion Tidbits

  • Conversions are not reversible. Once you convert the IRA to a Roth IRA, you cannot change your mind.
  • The IRA conversion must be completed by December 31 of each year to complete a conversion for that year.
  • The IRA participant can convert an unlimited amount of IRA, SIMPLE IRA, or SEP IRA funds to a Roth IRA.

What is a recharacterization?

A recharacterization occurs when the IRA participant makes an annual, regular contribution to one type of IRA and later treats it as made to another type of IRA.  A regular contribution is the annual contribution you are allowed to make to a traditional or Roth IRA. For example, the IRA participant makes a Roth IRA contribution and later changes her mind and applies it as a Traditional IRA contribution. Lastly, a recharacterization does not include a conversion or any other rollover.

Recharacterizations Are Reversible

IRA recharacterizations are reversible during a year. For example, an IRA owner can recharacterize a Traditional IRA contribution as a Roth IRA contribution in January, and then decide to recharacterize the same contribution again in March. To recharacterize a regular IRA contribution, you tell the trustee of the financial institution holding your IRA to transfer the amount of the contribution plus earnings to a different type of IRA (either a Roth or traditional) in a trustee-to-trustee transfer or to a different type of IRA with the same trustee. If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA).

Recharacterizations are Subject to the Annual IRA Contribution Limit

The maximum IRA amount that can recharacterized is the annual IRA contribution limit. If recharacterizing a 2020 Traditional or Roth IRA contribution, an IRA participant may recharacterize up to $6,000 ($7,000 if eligible for a catch-up contribution).

Recharacterizations can be Processed for the Prior Year

IRA participants have until October 15, 2021, to recharacterize a 2020 contribution, if they file their 2020 tax return timely.

IRA Conversion Vs. Recharacterization Chart

What are my Self-Directed Solo 401k options if I am no longer self-employed?

For owners of owner-only businesses who are no longer self-employed, and wish to close their solo 401k plan,  you have two options:

Option 1:

You can either take the funds from your Solo 401k as a Taxable Distribution. If you are under 59 1/2 you will pay a 10% early withdrawal penalty along with ordinary income taxes on the amount of the distributions.   In that case, please submit the following online form to let us the information needed for the required tax reporting: CLOSING PLAN: Full Pretax Solo 401k TAXABLE DISTRIBUTION Form – My Solo 401k Financial

Option 2:

Your other option is to do a direct rollover to another qualified plan such as an IRA.  In that case, please submit the following online form to let us the information needed for the required tax reporting: Full Transfer of Pretax Solo 401k to Pretax IRA – My Solo 401k Financial  Note: If you have Roth funds, please submit the following online form: Full Transfer of Roth Solo 401k Funds to Roth IRA – My Solo 401k Financial

What Happens After I choose One of the Above Options?

A final Form 5500-EZ regardless if the value of the account was under $250,000, and a Form 1099-R will need to be issued to formally close the plan with the IRS.