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Transfers and Rollovers

Rolling funds out of the Solo 401k

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Rolling funds out of the Solo 401k is called an “in-service distribution” when the Solo 401k plan and its adopting business are still active.

Most clients do not want to roll funds out of the Solo 401k because of its checkbook control and ability to invest in a wide range of investments. However, there may be certain cases when a client wishes to roll funds out of the Solo 401k.

The ability to take an in-service distribution from the Solo 401k is based on:

  • The type of funds, and
  • Certain requirements
Type of fund in the Solo 401kCan you roll it out of the Solo 401k?
Rollover fundsYes, at any time
Voluntary after-tax contribution fundsYes, at any time
Pre-tax elective deferral/employee contribution fundsYes, if you have attained age 59.5
Roth elective deferral/employee contribution fundsYes, if you have attained age 59.5 and after a 5-year taxable period (beginning with the taxable year the Roth contribution was made)
Non-elective/employer contribution fundsYes, if you have attained age 21
In-plan Roth rollover funds (e.g. from an in-plan Roth conversion)Yes, after a 5-year taxable period (beginning with the taxable year the Roth conversion was performed

An in-service distribution can be rolled into another retirement account. To check which types of retirement accounts can receive funds from the Solo 401k, see the IRS rollover chart below:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Inherited IRA

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I inherited a 401k from my mother who passed away. The current financial institution told her that unless there was an inheritance clause for rollover allowed in the 401k, that they could not authorize a rollover and it would need to be cashed out. Can this inherited account be rolled over into my Solo 401k plan?

Answer:

A 401k that you inherited can not be rolled over into your personal Solo 401k or IRA. It can only be rolled over into Inherited IRA, you can find the details explained at the following link on the IRS website:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

 

Basically, the new Inherited IRA has to be setup in the name of the deceased, with you as the beneficiary. You will have the control over the account and will be subject to RMD. If you need any further guidance on this please consult with your CPA.

Transfer an annuity into my Solo 401k

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How do I transfer my IRA annuity into my Solo 401k?

Answer:

An annuity is simply an investment of an IRA. IRS rules allow you to transfer any IRA (except Roth) into your new Solo 401k plan.

In order to do so, you will need to contact the company holding your annuity and sell or liquidate it. Then you can simply request a Direct Rollover of your IRA into your Solo 401k plan.

The rollover instructions and form are located here:

Transfer/Rollover

Direct vs. indirect rollover

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Should I do a direct or indirect rollover into my Solo 401k?

Answer:

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.

Can my wife transfer her 401k from a former employer to my Solo 401k plan?

Answer:

No, she cannot rollover her retirement funds into your account. All retirement accounts are individual and tied to a Social Security Number, so she would not be able to rollover her IRA or 401k into your individual account. (The only exception would be upon death).

However, your wife can participate in your Solo 401k if she is also employed by the business. If she participates in the Solo 401k, she can have her own participant account.  She can then rollover her IRA or 401k into her own account under the same Solo 401k plan.

 

My rollover was incorrectly reported as normal distribution on Form 1099-R

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When I set up my Solo 401k, I contacted my custodian to request a direct rollover from my existing IRA into my Solo 401k. Now the custodian sent me Form 1099-R for the rollover. Is this correct? If it’s reported as a distribution, how do I correct it?

Answer:

When you request a rollover, the custodian reports the transaction to the IRS by issuing Form 1099-R.

First, check the 1099-R to make sure it was completed correctly.

CORRECT

  • Box 1:  Rollover amount
  • Box 2.a:  Should be “0.00”
  • Box 7:  Should be “G”

Code G is for a “Direct rollover of a distribution to a qualified plan.” If the custodian entered “0.00” in Box 2.a. for the taxable amount and “G” in Box 7 for the Distribution code, they are telling the IRS that a direct rollover was performed and it was a non-taxable event. This is correct.

INCORRECT

  • Box 2.a:  Anything other than “0.00”
  • Box 7:  Anything other than “G”

If the custodian entered anything other than “0.00” in Box 2.a. for taxable amount, it is incorrect. Or, if the custodian entered a code other than “G” in Box 7 for Distribution code, it is incorrect.

If the 1099-R was not issued correctly, the custodian either did not process your request for a direct rollover correctly or misreported it on the 1099-R.

  • Contact the custodian and request that they reissue a corrected Form 1099-R.
  • Alternatively, you can request help from your CPA. Give the 1099-R to your CPA and inform him/her that the funds were rolled over directly into your 401k plan. Your CPA may properly offset that on your tax return by indicating that the funds were deposited into a qualified plan. In this case, the IRS will likely contact you asking you for proof that the funds were rolled over into your 401k.  Proof would include a bank statement for your 401k trust account showing the deposit of funds, your plan documents with IRS Determination letter, and a letter of explanation.

Note: IRS Form 5498 cannot be used to correct this error as it is not applicable to direct rollovers into a 401k.

Form 5498 is used for an indirect or 60-day rollover, in which a distribution is taken from your IRA and then deposited into another IRA within 60 days. This form is not applicable for the 401k and for direct rollovers. It is only applicable for IRAs.

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