Solo 401k Rollovers Explained (How It Works, Benefits, and Rules)

A rollover is one of the fastest methods of funding your solo 401k account. You’re allowed to rollover assets from almost any retirement account, and there are no limits on how much you can rollover. If you’re considering a solo 401k rollover, let’s go through how it works and why you should consider moving funds from another retirement plan into your solo 401k.

What is a solo 401k rollover and how does it work?

A rollover is the transfer of funds or assets from one retirement account into another. In a solo 401k rollover, the account receiving the assets would be your solo 401k.

The main benefit of doing a solo 401k rollover is to put your funds to better use in an account that has more tax advantages, perks, and investment choices. A solo 401k has the highest contribution limits, a wider range of investment options, a Roth option, ability to take a loan, and catch-up contributions if you’re over 50 years of age.

Not everyone is eligible for a solo 401k but if you are, it’s almost always a no-brainer to maximize your contributions to a solo 401k over another retirement account due to its tax deduction flexibilities and wider range of investment options. Additionally, a rollover that consolidates all of your funds into a single account could help eliminate administration fees, save time, and allow you to make larger investments into things like real estate, crypto, and private equity.

What accounts can I rollover into a solo 401k?

You can rollover any type of retirement account into a solo 401k including:

The only type of retirement account that the IRS doesn’t let you rollover into a solo 401k is a Roth IRA.

Note that the SIMPLE IRA requires you to have held your SIMPLE IRA account for at least two years before you’re allowed to rollover to another account. Also note that depending on your current employer, you may not be allowed to rollover a company 401k if you’re still employed there.

Can I have both a company 401k and a solo 401k?

Yes, you can open a solo 401k even if you have a 401k plan with an employer at your day job.

Also read: Can I Have Both a Solo 401k and a Regular 401k?

How much can I rollover into a solo 401k?

There are no limits to how much you can rollover to a solo 401k.

With contributions, you’re bound by the yearly contribution limits set by the IRS. With rollovers, there is no limit. You’re allowed to rollover as much as you like. This is the main reason why a rollover could be one of the fastest, most effective ways to fund a solo 401k and take immediate advantage of the additional benefits the plan offers.

Do I still have the same contribution limit after a rollover? Yes, rollovers and contributions are treated differently. A rollover does not affect your contribution limit and you are still allowed to contribute up to the maximum amount allowed for the year.

Can I rollover assets or do I need to convert them to cash first? You can rollover both cash and/or assets into a solo 401k account.

How to do a solo 401k rollover

There are two ways to do a solo 401k rollover: direct and indirect. In most cases, unless you need access to your account funds, you should opt to use a direct rollover to avoid risk of taxes and penalties.

Let’s talk a look at the two types of rollovers.

Direct rollovers

A direct rollover is the simplest and cleanest way to rollover funds into a solo 401k account. With a direct rollover, you’re transferring funds directly from your old account custodian to your new solo 401k account custodian. The rollover check is made out to the name of the receiving plan (the plan custodian), and not you (the plan participant).

Indirect rollovers

With an indirect rollover, instead of transferring directly to a solo 401k plan, you’re transferring the funds to yourself first. It’s up to you to then deposit that into your solo 401k account. You get 60 days to deposit the funds, and if you’re late, you’ll trigger an early-distribution penalty of 10%.

Not only that, but when you use an indirect rollover, the IRS requires your old plan custodian to withhold 20% from your check. In case you’re unable to make the timely deposit into your new account, the 20% withheld amount would be used to pay the penalties for your early distribution. You’re required to deposit the full amount into your new solo 401k. But because 20% of it was withheld from your check, it’s up to you to come up with the difference. After you deposit the full amount, the withheld amount will be refunded back to you as a tax credit.

Example: Let’s say you want to do an indirect rollover of $50,000 from your 401k at work into your solo 401k account. Your employer will withhold 20% and send you a check for $40,000 rather than the full $50,000. Then, you get 60 days to come up with the additional $10,000, and deposit the full amount of $50,000 into your solo 401k. Once the IRS sees that you deposited the money and that the full amount was rolled over, you’ll be refunded the withheld amount of $10,000.

How many rollovers can I do in a year?

You can perform a direct rollover as many times as you like. If you have funds or assets sitting in multiple different retirement accounts, you can choose to transfer all of them over to your solo 401k in a single year.

However, you are limited to just one indirect rollover in a 12 month period.

Also read: Key Differences Between Direct And Indirect Rollovers

What are the benefits of rolling over funds to a solo 401k?

The solo 401k gives you the most freedom and biggest tax advantages compared to any other retirement account.

Here are some of the main benefits.

Invest in virtually any asset class

The biggest benefit of moving over your funds to a solo 401k is that you can invest the same funds into a wider range of investments. Instead of being limited to just traditional assets (like stocks, bonds, mutual funds, and ETFs), you can also choose to invest in alternative assets like crypto, real estate, and startups.

In comparison, with a regular 401k, you’re limited to investing in whatever options your company plan offers (usually around 8 to 12 different mutual funds). With an IRA (traditional or Roth), you’re typically limited to investing in only traditional assets unless you open a special self-directed IRA that gives you access to alternative assets.

Also read: What Can I Invest In Through A Solo 401k?

Highest contribution limits

A solo 401k has one of the highest contribution limits of any retirement plan. You can contribute up to $66,000 to a solo 401k for 2023. In comparison, an IRA has a contribution limit of just $6,500 for 2023 and a 401k has a limit of $22,500.

Catch-up contributions

If you’re 50 years of age or older, you can contribute an additional $7,500 into your solo 401k for 2023, bringing your contribution limit to $73,500.

Roth option

A Roth solo 401k lets you take tax-free withdrawals in retirement, no matter how large your investments may have grown. And a solo 401k comes with one of the largest Roth accounts.

You can make all of your employee contributions to a Roth solo 401k account, allowing you to contribute up to $22,500 if you’re under 50 years or old, or up to $30,000 if you’re 50 years of age or older. And if you want to put even more money into your Roth solo 401k, you also have the option to do a mega backdoor Roth conversion.

Largest tax deductions

If you prioritize tax deductions, you have the option to make up to $66,000 ($73,500 if age 50+) as pre-tax contributions and get a tax deduction. The best part is that the best solo 401k plan providers offer both a pre-tax and Roth option and you get to choose which account to contribute to, and how much you want to put into each account.

Solo 401k loan option

You’re allowed to take out a loan from your solo 401k plan in the amount of 50% of your plan value (up to a maximum of $50,000). Interest is prime rate plus one or two percent, and you have five years to pay it back. Because you’re borrowing money from your own account, solo 401k loans don’t have a lengthy application process and you can receive the funds quicker than regular loans.

Wrapping Up

Rolling over funds from another retirement account is the fastest way to fund your solo 401k. Any rollovers don’t count towards contributions for the year, and there is no limit on how much you can transfer.

A solo 401k is the best tax-advantaged retirement account for self-employed individuals and business owners with no employees. A solo 401k offers the highest contribution limits, a Roth option, freedom to invest in virtually any asset class, and the ability to take out a loan. If you qualify for a solo 401k, it’s almost always a good decision to prioritize maximizing your solo 401k account over other retirement accounts.

The Ocho Solo 401k can help you set up your account, and take care of rollovers for you. Learn more here.