Should I do a direct or indirect rollover into my Solo 401k?
Direct rollovers are strongly recommended for funding your Solo 401k.
Direct rollovers are non-taxable events. The payment is made directly from one retirement plan to another.
While indirect rollovers may be possible, they are not recommended since they can lead to an IRS inquiry on rollover funds. In an IRS inquiry, you as the Solo 401k plan participant would bear the burden of proving that the funds were rolled over, without the benefit of a form to officially document it.
*Note that Form 5498 cannot be used to document an indirect rollover into a 401k plan.
In an indirect rollover, a retirement plan participant first requests a distribution. The retirement funds are received by the participant as a distribution. The participant must then roll the funds over to another retirement plan. An indirect rollover must be completed within 60 days to avoid taxation and penalties.
Because the retirement funds are first distributed to the participant, a distribution will be reported on IRS Form 1099-R. (This will be reflected in Box 7 of the form by code 1 for “Early distribution” or code 7 for “Normal distribution,” depending on the age of the participant).
If the participant rolls the funds over to an IRA, the receiving IRA custodian would be required to report the receipt of the funds through Form 5498. This would serve as documentation that the funds were rolled over into another plan.
However, Form 5498 is not applicable for 401ks. There is no form for a 401k to report the receipt of rollover funds and thus document that the funds were rolled over into the 401k. Form 5498 is only applicable for IRAs. The form would not apply for a Solo 401k.
Direct rollovers are best for Solo 401ks. Our instructions explain how to initiate a direct rollover into your Solo 401k. It’s important to follow our instructions to avoid triggering a taxable event.