It is a common question to be asked whether one can rollover existing retirement funds into a Solo 401(k) Plan. In this article, we look at Solo 401(k) rollovers vs contribution, and the types of rollovers you can make with your retirement account(s).
The Solo 401(k) Rollover
The answer is yes, you can perform a Solo 401(k) rollover as long as 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 pre-tax retirement funds you intend on rolling over to a 401(k) or 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.
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.
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 $56,000 if he or she is under 50 and $62,000 if he or she is over the age of 50. 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) or Solo 401(k) Plan 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) or Solo 401(k) Plan. 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 401(k) or 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 his Solo 401(k) Plan. In other words, there is no limitation on the amount of pre-tax IRA or qualified plan retirement funds that can be rolled into a 401(k) or Solo 401(k) Plan, while, in the case of a 401(k) or Solo 401(k) contribution, an annual contribution limitation of $56,000 or $62,000 for 2019 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.