Report Employer 401k Direct Rollover | Solo 401k Plan | Form 1040

SCENARIO: It appears that I did not properly report the direct rollover of my former employer 401k to solo 401k on my personal tax return form 1040. Reason being, the IRS letter notice says I may owe additional income taxes if I agree with their findings, which obviously I don’t.  The IRS letter basically states that I received a form 1099-R from previous 401k provider showing that funds were disbursed and reported by the releasing institution on form 1099-R using code “G” which is the code used to communicate to the IRS the direct rollover/movement of funds from one retirement plan to another. The same IRS letter communication has a section where I can indicate whether or not I agree with the IRS findings.

ANSWER: You may have not properly reported the movement of funds to your solo 401k on your form 1040 lines 15a,b. These lines are where you are supposed to report the direct rollover from one qualified such as a 401k plan or pension plan to another qualified plan such as a solo 401k plan. A direct rollover is reportable but not taxable.   

Note that the reporting is the same if you had processed a direct rollover from an IRA to your solo 401k plan. The only difference is that you would report the IRA direct rollover on lines 16a,b of your Form 1040.

Processing the Correction:

This is a simple correction requiring the submission to the IRS by fax of the following three (3) documents.   

Document 1. As detailed in the IRS letter notice, you need to complete page 8 of the IRS notice and check off "I don't agree with some or all of the changes", sign your name and date.
  
Document 2. Submit copy of the Form 1099-R issued by your former employer’s 401k provider showing the direct rollover and reporting code “G” in box 7.  

Document 3. Submit a letter signed by you detailing the following, or similar language. Your current solo 401k provider or tax professional should be able to help you with the brief explanation language. 

Re: Notice CP2000; Tax Year 2011; Pension Transfer Correction

To Whom It May Concern:

This is in response to your recent letter regarding the 401k transfer from my former employer in the amount of $XX,XX.XX to my solo 401k plan. Because the funds were directly rolled over from one 401k plan to another, the movement of the funds is not taxable.  

To further confirm the direct rollover from my former employer 401k to my Solo 401k plan, I have enclosed a copy of the 1099-R form issued by my former employer’s plan administrator plan showing the total direct rollover with a letter code of “G”. 

Solo 401k Lon Option vs. Solo 401k Promissory Note Loan

QUESTIONS: Can you please check on the 2 different options for loans of the Solo 401k?
 

First, promissory note to a 3rd party company in which I am an independent contractor;
 

second, a personal solo 401k loan.

Thank you !
 

K. F. From Colorado

ANSWERS: 

Solo 401k Investment vs. Solo 401k Loan

First, a promissory note or loan to a third party including a third party company falls under the solo 401k investment category. So, for example, instead of investing the solo 401k plan in a mutual fund, it can be invested in a promissory note or loan to a third party or company.

On the other hand, a solo 401k plan loan differs from a promissory note investment in that the trustee/participant of the Solo 401k borrows from his or her own solo 401k through a solo 401k participant loan. Therefore, it is not treated as investment but rather a personal loan from the solo 401k that is repaid to the solo 401k by the trustee/participant.

Investing Solo 401k through a Promissory Note to a Third Party

A solo 401k promissory note investment to a third party, whether to an individual or a company, qualifies as an investment provided the solo 401k prohibited transaction rules are not violated.  

 Found in IRC 4975 and ERISA 406, a promissory note investment by a solo 401k to a third party is not prohibited if the following conditions are satisfied:

The solo 401k trustee/participant does not receive a personal benefit (e.g., a commission) from the Solo 401k plan’s investment (In your case, you may not receive a commission based on the fact that you would loan your solo 401k funds in the form of a promissory note to the third-party company.)

The Solo 401k trustee/participant does not gain access to the use of the 3^rd party’s facilities as a kickback for the solo 401k promissory note.  For example, if the Solo 401k promissory note investment was to a golf country club and in turn you used their facilities as a result of the loan, this would be a prohibited transaction because as the trustee of the solo 401k plan you would be personally benefiting from the investment. 

The 3^rd party that you are lending the solo 401k funds cannot be performing services for your solo 401k. For example, you cannot lend your Solo 401k funds to your solo 401k provider because the solo 401k provider performs services for the solo 401k plan.

As the solo 401k trustee you cannot own a 50% or more equity interest of the 3^rd party company.

As the Solo 401k trustee you cannot be an officer, director (or individual having powers or responsibilities to those of officers or directors), or a highly compensated employee.

If the promissory note is to an individual, the following as considered disqualified persons with respect to the solo 401k; therefore, it would be prohibited to process a solo 401k promissory note investment to the following individuals.

Solo 401k Disqualified Persons: You, your spouse, your natural parents and/or adoptive parents, your natural grandparents, your natural children, and fiduciary or service provider of your solo 401k.

Solo 401k Participant Loan

As detailed above, under a solo 401k loan, where the solo 401k plan participant/trustee borrows from his or her own solo 401k, the following rules apply:

• The solo 401k loan must be paid back over 5 years, or 15 years if the funds are used towards the purchase of the solo 401k participant’s primary residence/ dwelling.

• You can borrow 50% of the solo 401k balance up to a maximum of $50,000.

• The solo 401k loan payments are fixed made either quarterly or monthly which is determined at the time of the loan and cannot be later changed.

• Payments consist of principal and interest.

• The interest rate is based on the prime rate plus 1 point at the time of the solo 401k loan.

• The solo 401k provider where you open a solo 401k will need to document the solo 401k loan. The Solo 401k loan must be documented in accordance with the prescribed IRS Solo 401k loan rules.  

Self-Directed Solo 401k Brokerage Account | Fidelity Non-Prototype Account

We spoke briefly yesterday about using your self-directed solo 401k plan with a new Fidelity Brokerage Account (I already have some accounts at Fidelity)  Could you please answer some questions for me?

QUESTION 1: I set-up my business as an LLC.  Could the Solo 401k be set-up under the LLC or must I set it up as an individual under my SSI?

ANSWER: In order to open a solo 401k, you must be self-employed with no full-time employees; these are the two main IRS requirements. Further, the solo 401k is sponsored by the self-employed business, regardless of entity type (i.e., it can be a sole proprietor, LLC, partnership or corporation).  As such the LLC would be the one sponsoring the Solo 401k. Keep in-mind that the new EIN number would need to be established for the Solo 401k.

QUESTION 2: How is recordkeeping for the solo 401k loan repayment handled?  I assume the payments are made to the Fidelity Account, so as Trustee do I need to log the payments?

ANSWER: As the trustee of the Solo 401k plan, you, not Fidelity, will be responsible for following the solo 401k loan payment schedule that we prepare and thus making sure the loan payments are made timely. Keep in-mind that Fidelity’s only role with the self-directed solo 401k is to provide a non-prototype brokerage account. They are not the trustee, fiduciary or administrator of the Solo 401k plan.  

QUESTION 3: I have an old solo 401k with Expert Plan that I am considering transferring; however there is small loan outstanding on it.  Can I transfer the loan with the other assets to the new solo 401k plan?

ANSWER:  You will need to check with your current solo 401k provider as most of the time you have the option to either pay off the outstanding solo 401k loan or take it as a taxable distribution, especially if the solo 401k loan is in default.

 Thanks for your help.

John L. from Maryland

Transfer IRA Real Estate to Solo 401k | IRA Custodian

QUESTION: Do you have a form that would act as a transfer request

(i.e., form to transfer an IRA to a solo 401K)?

Background:  My first real-estate property purchase looks like it will close in the next two weeks.  I purchased it through a custodian American Estates & Trust, LC  FBO: my  IRA

This IRA account was set up prior to my decision to open a self-directed solo 401k plan in order to acquire the property located in Arizona back in November.

This was a very laborious  as each move required either  a DOI letter   or   ADI Letter  delaying doc  transferring   48 hours  + and fees,  so my plan is  once the property closes  to transfer this AZ real estate  asset  into my  solo 401k plan set up through you. I am anticipating a push back from the current trust company, AE&T, so perhaps with a transfer form from your company it will make transfer of my IRA to my solo 401K a smoother process?

Thanks, PW from Texas

ANSWER: As a solo 401k provider, the preparation of IRA transfer forms is included in our solo 401k pricing; therefore, I will e-mail a transfer form to you shortly.  Because the IRA transfer rules allow for the transfer of assets such as real estate in-kind to a solo 401k, your current self-directed IRA custodian should have no problem processing your IRA direct rollover request to a Solo 401k. Just make sure that they follow the instructions contained on the transfer form that specifically detail the IRA owned real estate is to be transferred in-kind in the name of your solo 401k.  This is very important as registering the IRA owned real estate in your name could cause negative tax consequences if not deposited (re-registered in the name of your solo 401k) within 60 days.