How Solo 401k Rollovers Work

Looking to open a Solo 401k plan? Get started today with just a few clicks – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both Traditional and alternative assets, take out a loan, perform rollovers, or do a Mega Backdoor Roth conversion with a few clicks.

A rollover is the fastest, most effective way to fund your Solo 401k account. You’re allowed to rollover funds 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 one.

What is a rollover and how does it work?

With a rollover, you’re basically transferring funds from an old retirement account into a new one. In this case, the new account would be the Solo 401k.

The main reason for doing a Solo 401k rollover would be 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, freedom to invest in what you want, a Roth option, ability to take a loan, and catch-up contributions if you’re over 50 years old.

Not everyone is eligible but if you are, it’s almost always a no-brainer to maximize your contributions to a Solo 401k over another retirement account.

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, startups or private companies, and private funds.

Let’s look at some of the benefits of rolling over funds into a Solo 401k.

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

The Solo 401k gives you the most freedom, and some of the biggest tax advantages compared to any other retirement account. Here are some of the benefits:

You get full control of what you invest in: With a Traditional 401k, you’re limited to investing in whatever options your company plan offers (usually just a handful of mutual funds). With a Solo 401k, you can invest in any asset class, whether it’s real estate, real estate, startups or private companies, or private funds.

It has the highest contribution limits: A Solo 401k allows you to contribute as both the employer and the employee. For 2024, the Solo 401k contribution limit is $69,000. You can contribute up to $23,000 as an employee and 25% of your income as an employer if you’re incorporated (or approximately 20% of your income if you’re not incorporated).

You get catch-up contributions: If you’re at least 50 years old, you’re given additional catch-up contributions of $7,500 for 2024.

You get a Roth option: A Solo 401k also comes with one of the largest Roth accounts. You’re allowed to make all of your employee contributions to a Roth Solo 401k account.

You have the option to take out a Solo 401k loan: You’re allowed to take out a loan from your account in the amount of 50% of your plan value (up to a maximum of $50,000). If you have $100,000 in your nest egg, you can withdraw up to $50,000 of it. However, a Solo 401k loan should only be used as a last resort. Not only do you have to pay interest (usually Prime Rate + one or two percent), you’re also depleting your account of funds that could be invested and earning you interest.

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! As long as you have self-employed activity, and you don’t have any employees that work over 1,000 hours per year in your business (other than your spouse), you can qualify for a Solo 401k even if you have other retirement accounts like a company 401k.

How much can I rollover into a Solo 401k?

Good news. There are no limits to how much you can rollover to a Solo 401k. Whether you have $5,000 or $500,000, you can rollover nothing, a portion, or the full amount 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 tax savings.

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.

Direct vs Indirect Rollovers

There are two ways to do a Solo 401k rollover: direct and indirect.

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

TLDR; In most cases, unless you need access to your account funds, you should opt to use a direct rollover to avoid triggering unwanted taxes and penalties.

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 taxes on 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.

As you can see, a direct rollover is so much simpler and avoids having to worry about triggering tax penalties.

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 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.

Looking to open a Solo 401k plan? Get started today with just a few clicks – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both Traditional and alternative assets, take out a loan, or do a Mega Backdoor Roth conversion with a few clicks.