Solo 401(k) rollovers and contributions are not the same, but it is a common question retirement investors ask. In this article, we look at Solo 401(k) rollover vs contribution, and the types of rollovers you can make with your retirement account(s).
- Solo 401(k) Rollovers and Contributions are two ways to fund the plan
- Rollover funds come from another retirement plan
- Contributions generally come from cash considerations, either made on a pretax or Roth basis
What is a Solo 401(k) Plan?
A Solo 401(k) plan is not a new type of retirement plan. It is a traditional 401(k) plan covering only one employee. In general, to be eligible to establish a Solo 401(k) plan, one must be self-employed or have a small business with no full-time employees, other than a spouse or other owner(s).
As the name implies, the Solo 401(k) plan is an IRS-approved qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. It works best when there are no other employees or a very small number of employees.
Read More: Solo 401(k) Investments
The Solo 401(k) Rollover
Can I rollover my 401(k) to a Solo 401(k)? Yes, a 401(k) can be rolled over to a Solo 401(k), under the assumption that you are eligible for a Solo 401(k) and if the funds are not Roth IRA funds. In general, you can better understand a 401(k) rollover as existing retirement funds. This can be either IRA, SEP IRA, SIMPLE IRA, 401(k), profit sharing, or other pretax retirement funds you intend on rolling over to a 401(k) or Solo 401(k) Plan.
Learn More: What is a Solo 401(k) Plan
401(k) Transfer vs 401(k) Rollover
The difference between a 401(k) or Solo 401(k) Plan transfer vs a rollover is that transfers are generally between IRA and IRA, or for inter-plan transfers. Anytime that IRA or outside qualified plan funds are transferred to a new or existing 401(k) Plan, the movement of funds is treated as a rollover. When it comes to rolling over funds to a 401(k) or Solo 401(k) Plan, you should complete a direct rollover.
Two Types of Rollovers
Direct Rollover
A direct rollover is the direct movement of retirement funds from an existing retirement custodian directly to the 401(k) Plan custodian. In other words, the rollover check must be made out to the name of the receiving 401(k) or Solo 401(k) Plan and not the plan participant. Whereas, in the case of an indirect rollover, the funds are transferred directly to the plan participant and the plan participant has 60 days to move the funds to another retirement plan.
The downside of an indirect rollover is that, in general, the payer custodian would be requited to withhold 20% of the gross amount of the funds as a withholding tax. The recipient must then make up the 20% shortfall to avoid being subject to tax on the 20% withholding. Therefore, when moving retirement funds to a 401(k) or Solo 401(k), the individual should strive to engineer a direct rollover of funds and not an indirect rollover which would trigger a 20% withholding tax.
Remember, the check should be made out to the receiving plan. Also, make sure to use the correct terminology – a transfer essentially involves IRAs, whereas a rollover involves a 401(k) Plan.
Indirect Rollover
In the case of an indirect rollover, the funds are transferred directly to the plan participant and the plan participant has 60 days to move the funds to another retirement plan. The downside of an in-direct rollover is that, in general, the payer custodian would be required to withhold 20% of the gross amount of the funds as a withholding tax. The recipient would then have to make up the 20% shortfall to not be subject to tax on the 20% withholding. Thus, in sum, when moving retirement funds to a Solo 401(k), the individual should strive to engineer a direct rollover of funds and not an indirect rollover which would trigger a 20% withholding tax. Remember, the check should be made out to the receiving 401(k) plan.
Related: Importance of Investment Diversity with Your Retirement Funds
Solo 401(k) Contribution
On the other hand, a contribution, such as a Solo 401(k) contribution, involves depositing or contributing funds to an IRA or 401(k) retirement plan from compensation earned by the payer not from existing retirement funds. For example, if an individual earns compensation from his or her self-employed business, the individual can contribute up to $69,000 if he or she is under 50 and $76,500 if he or she is age 50 or older (in 2024). Any such amounts contributed will be considered a contribution.
Whereas, if the individual has an existing IRA or 401(k) plan, the amount of retirement funds that are moved into the 401(k) would be treated as a rollover. Unlike a 401(k) contribution, there are no limitations or minimums on the amount of funds that can be rolled into a 401(k). The only time limit imposed is on the amount of annual contributions that can be made – not rolled over.
For example, if Joe is 55 years old and has a traditional IRA of $75,000, Joe can roll those IRA funds into a new Solo 401(k) plan he adopts for his new self-employed business. Whereas, if Joe earns $22,000 in compensation from his new business, Joe can only contribute $22,000 to the plan.
In other words, there is no limitation on the amount of pretax IRA or qualified plan retirement funds that can be rolled into a 401(k), while, in the case of a Solo 401(k) contribution, an annual contribution limitation of $69,000 or $76,500 for 2024 exists.
Get in Touch
To learn more about the 401(k) and Solo 401(k) Plan contribution and rollover rules, please contact a 401(k) specialist at 800-472-0646 or fill out the contact form to get in touch with a specialist at IRA Financial Group.
