Primer on Transfers, Direct Rollovers & Rollovers to a Solo 401k Plan

What are the transfer, direct rollover and rollover differences?

Transfer

A transfer entails moving the assets directly from another eligible retirement plan (e.g., 401k, PSP, DBP, TSP, 457b, etc.) to a solo 401k plan.

In a transfer, the check is made payable in the name of the solo 401k plan for the benefit of the participant (e.g., Large Group Capital Trust for the benefit of Jane Smith ).

If alternative investments such as real estate, private shares or promissory notes are being transferred, the assets need to be registered in the name of the solo 401k plan as outlined in the example above.

Direct Rollover

A direct rollover is similar to a transfer in that the check is made payable in the name of the solo 401k plan for the benefit of the participant; however the funds originate from an IRA not another eligible retirement plan such as a former employer 401k plan. Also, just like a transfer, the alternative investments being transferred from the self-directed IRA to the solo 401k plan are registered in the name of the solo 401k plan for the benefit of the participant. I have seen an uptick in direct-rollovers from IRA LLC to solo 401k plans where the LLC is assigned to the solo 401k plan, for example. This can be attributed to a number or things such as the fact that solo 401k plans are not subject to UDFI when the solo 401k utilizes debt to invest in real estate.

Rollover

A rollover occurs when IRA funds are moved indirectly to a solo 401k plan within 60 days from when they are first distributed from the IRA. In an indirect rollover, the individual receives a distribution from her IRA and the check is made payable just in the name of the individual and she has 60 days after the date of receipt to deposit those funds into a solo 401k plan.

How are transfers, direct rollovers & rollovers reported to the IRS?

While both transfers and direct rollovers are not taxable, they are reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., by the releasing custodian using a  code “G” in box 7. On the other hand rollovers to a solo 401k plan are also reportable on form 1099-R but with a code 1 or 7 (based on your age) in box number 7.

Important Note: Because Form 5498, IRA Contribution Information, does not apply to 401k plans including solo 401k plans, the solo 401k custodian will not issue a Form 5498 for the receipt of the IRA or former employer funds to the solo 401k plan whether by transfer, rollover or direct rollover. However, the solo 401k trustee can file a Form 5500-EZAnnual Return of  a One-Participant Plan,to report such deposit of funds from an IRA or another qualified plan.

What is the limit in the number of transfers, direct rollovers and rollovers?

An individual can do an unlimited number of transfers and direct rollovers, but the rollover rules are little different. When determining the number of rollovers that an individual can do, you first have to determine if you are rolling over IRA funds or 401k funds, for example. If IRA funds are being rolled over, the individual can only do one IRA rollover to an IRA in a 12-month period. Traditional, Roth, SEP and SIMPLE IRAs are aggregated when applying the 12-month period. However, If the IRA is being transferred to an eligible retirement plan such as a solo 401k plan, the once per 12-month limitation does not apply. Same thing vice versa–that is, there are not restrictions on the number of  rollovers (indirect rollovers) from a solo 401k plan to an IRA in a 12-month period.

The much forgotten rule: the individual must complete the RMD before processing a transfer, direct-rollover, or rollover to a solo 401k plan

While there are no age restrictions for completing a transfer, direct-rollover, or rollover, beware of the RMD restriction. If you are planning to mover your retirement account (e.g., IRA and 401k) to a solo 401k plan, you first have to process the RMD from that account before moving the rest of the funds to a solo 401k plan, and no the RMD funds cannot be rolled over, transferred or directly rolled over to a solo 401k plan or another IRA.

Can I rollover personal funds to a solo 401k Plan?

Please note that you can’t “rollover” non-retirement funds to a Solo 401k.  While you can contribute your non-retirement funds to a Solo 401k, you would need to do so as a 401k contribution which would require that you have self-employment income.  Once you are ready to make contributions, please just let us know and we will guide you through the process to do so.

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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