Moving a Promissory Note IRA Investment to a Solo 401k Plan: Method 1 Rollover

Self-Directed IRAs are very popular for investing in promissory note investments.  As a result, when an individual  investor starts performing self-employment activity and thus qualifies to open a solo 401k, he or she will often transfer their self-directed IRA that holds promissory notes to a solo 401k plan.

There are two methods of moving a self-directed IRA that holds promissory notes to a solo 401k plan.  The self-directed IRA can either be transferred to a solo 401k via a “rollover” or via a “trustee-to-trustee transfer.”  Method 1 is discussed below and method two will be discussed in a separate blog post.

Method 1 (one): 60-day Rollover

When a promissory note held inside a self-directed IRA held with a custodian such as Pensco Trust, Millenium Trust Company or Equity Trust Company, to name few , is moved by way of a 60-day rollover, the following applies:

  1. The self-directed IRA custodian will prepare an assignment/change of ownership to basically remove itself as the custodian/trustee of the IRA owned promissory note investment.
  2. The self-directed IRA custodian will mail the promissory note assignment/change of ownership to the IRA participant.
  3. The IRA participant then has 60-days form the date he or she receives the promissory note assignment/change of ownership in the mail to rollover the promissory note to their solo 401k plan.
  4. The solo 401k trustee (the self-employed individual) will then prepare an assignment with the help of his or her tax professional before the expiration of the 60-day rollover window to formally approve the assignment of the promissory note investment from the self-directed IRA to the new solo 401k plan.
  5. The new assignment assigning the promissory note to the solo 401k plan generally contains the following pertinent language:
  • Assignor/Transfer: the IRA participant
  • Assignee: The solo 401k . For example, if the name of the solo 401k is Niners Solo 401k Trust and the trustee of the plan is Sally Joyner, the assignee is listed as: Sally Joyner, Trustee of Niner Solo 401k Trust.
  • Date: the date the assignment is executed is listed.
  • Signatures: The IRA participant sings once as the assignor, and a second-time on behalf of the solo 401k as the assignee because he or she is the trustee of the solo 401k.

Once the promissory note has been assigned to the new solo 401k within the 60-day IRA rollover window, and assuming only one 60 day rollover has been processed during a 12 month period which applies to all IRAs in aggregate, the promissory note borrower will need to update their records to now reflect the solo 401k as the note lender/beneficiary.

Lastly, the IRA participant/owner will need to report the 60-day rollover on his or her Form 1040 since the IRA custodian probably issued a 1099r with a code 1 or 7 not a G. The IRS may send the IRA participant/owner  a letter in about a year or two after asking him or her to provide supporting documentation for the rollover since a 1099r with a code 1 or 7 would have been issued.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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