This post addresses the necessary steps to ultimately close down a solo 401(k) plan because you are no longer self-employed but the goal is to still continue to maintain “checkbook control” over your retirement funds. The end result will be an IRA LLC, meaning that you will have an LLC that is solely owned by your IRA. This will allow you to invest in real estate and other alternative investments through an LLC whereby title to the investments are taken in the name of the LLC.
Both from a cost perspective and a functionality perspective, it will first be best to have the IRA LLC provider form an LLC and have the solo 401(k) invest in the LLC which will result in the solo 401(k) being the sole member of the LLC. Once this step has been complete, the IRA LLC provider can help open up a self-directed IRA with new self-directed IRA custodian. The solo 401k provider can then help you transfer the LLC from the solo 401(k) to the IRA.
Once the solo 401k has been transferred to the new IRA, the solo 401k provider will then take the following steps to close the Solo 401k with the government.
REPORTING THE FULL SOLO 401K DIRECT ROLLOVER TO A TRADITIONAL IRA
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.
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 TRADITIONAL IRA
The funds and the assets will already be invested in the LLC that will be setup for the solo 401k and will then be transferred in-kind to the self-directed IRA; therefore, the IRA LLC provider will simply update the LLC Operating Agreement to list the new owner of the LLC as the IRA.