Self-employed Solo 401k – What happens to my Solo 401k if I am no longer self-employed?
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Self-employed 401k FAQ: I anticipate being self-employed for some time. What happens if I have to stop? Would the account have to be converted back to a regular IRA?
RESPONSE:
Great question! It will depend on the facts and circumstances.
First, please recall that a Solo 401k is for a business.
As such, if the solo 401k owner is formally shutting down the self-employed business (e.g. if the self-employed business is operated via an LLC and the LLC is formally shutdown), the Solo 401k plan that is sponsored by the entity would also have to be shut down and the assets transferred over to an IRA. The transfer to an IRA would be reportable on a Form 1099-R, which we handle as part of our service for no additional charge. In addition, a final form 5500-EZ would have to be filed (even if the value of the plan assets has always been less than $250,000) in order to properly wind down the plan. If there are alternative investments in the Solo 401k (such as real estate) such assets would have to be transferred to a self-directed IRA (such as our IRA LLC) that can accommodate such alternative investments.
On the other hand, let’s say that the solo 401k owner is self-employed as a sole proprietor and such person obtains a W-2 job so maybe the self-employment activity decreases significantly but such person is still reporting a least a minimal amount of self-employment activity on their taxes. In that case, the Solo 401k plan could still be maintained.
Company Folded QUESTION
In order to continue with the solo 401k plan, self-employed business must be tied to it. The solo 401k plan can be updated to another self-employed business if applicable. On the other hand if you permanently cease self-employment activity, the solo 401k plan will need to be closed with its assets and funds transferred to an IRA, for example. Subsequently, the plan will need to be formally closed with the IRS by issuing a final Form 1099-R and Form 5500-ez.
