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What is the Difference Between a 401K Rollover and a 401K Contribution?

It is a common question to be asked whether one can rollover existing retirement funds into a Solo 401K Plan.

The Solo 401K Rollover

The answer is clearly yes, as long as the funds are not Roth IRA funds. In general, a rollover can be best understood as existing retirement funds, either IRA, SEP IA, SIMPLE IRA, 401K, 403(b), pension plan 457, ESOP, profit sharing, or other pre-tax retirement funds that are rolled over or transferred directly to a new or existing 401(k) Plan. In other words, to have a rollover one must have existing retirement funds that are intended to be rolled-over to a 401(k) or Solo 401(k) Plan. The difference between a 401K or Solo 401K Plan transfer and a rollover is a transfer is generally between IRA and IRA or for inter-plan transfers. Anytime 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 401K Plan, one should attempt to complete a direct rollover. A direct rollover is the direct movement of retirement funds from an existing retirement custodian directly to the 401K Plan custodian. In other words, the rollover check would 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 would then have to make up the 20% shortfall in order to not be subject to tax on the 20% withholding. Thus, in sum, when moving retirement funds to a 401K, Solo 401K, Individual 401K, or Self Directed 401K Plan, 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 401K Contribution

A contribution, on the other hand, involves funds deposited or contributed 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 $49,000 if he or she is under 50 and $54,500 if he or she is over the age of 50. Any such amounts contributed would be considered a contribution. Whereas, if the individual had 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 a limit is imposed is on the amount of annual contributions that can be made – not rollover. For example, if Joe is 55 years old and has a traditional IRA of $75,000, Joe could roll those IRA funds into a new 401(k) or Solo 401K Plan he adopts for his new self-employed business. Whereas, if Joe earned $22,000 in compensation from his new business, Joe would only be able to 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 401K or Solo 401(k) Plan, while, in the case of a 401K or Solo 401(k) contribution, for 20011 an annual contribution limitation of $49,000 and $54,500 for those over the age of 50 exists.

To learn more about the 401(k) and Solo 401K Plan contribution and rollover rules, please contact a 401K expert at 800-472-0646 or visit

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Posted in 401(k), Solo 401(k)

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