Solo 401k: Rollover, Direct Rollover, and Transfer; what's the difference?

An individual may move assets between various types of retirement plans through a rollover, a direct rollover, or a transfer. However, each method results in different reporting and tax consequences.

Although the rollover, direct rollover, and transfer achieve the same result (the movement of retirement funds to a Solo 401k) there are clear-cut procedures for each process. These rules must be carefully followed to ensure that the movement of funds remains a tax-free transaction. These methods are discussed below.

ROLLOVER. A rollover takes place when and individual takes a distribution (i.e., physically takes possession of the check or assets) from his or her IRA or from a qualified plan such as a 401k or Solo 401k and then deposits the proceeds to another IRA or another Solo 401k. For purposes of the 60-day rule, the date on which a distribution is actually received is the start date of the 60-day period. See [Treas. Reg. 1.402 (c)-2, Q&A-11].  If assets in a traditional IRA, SEP or SIMPLE IRA are paid directly to the Solo 401k owner (i.e, made payable in his or her name without also listing the “401k” on the check, or in the case of an in-kind transfer (an asset—mutual fund, stock, notes or real estate), the releasing custodian or trustee will report the distribution on form 1099-R using either code 1-early distribution if you are under age 59 1/2, or code 7-normal distribution if your are age 59 ½ or older.  IMPORTANT: In the case where a qualified plan such as a profit sharing plan or 401k is being distributed as rollover, federal income tax withholding is required. See [I.R.C. 3405(a), 3405(b), 3405(c)]

With respect to a 401k or PSP, What tax amount must be withheld from a rollover distribution?

The amount of tax withholding on all rollover distributions is 20% of the amount being distributed. See [Treas. Reg. 31.3405 (c)-1, Q&A-11]      

DIRECT ROLLOVER. A direct rollover occurs when assets are moved directly from an IRA, SEP or SIMPLE IRA to a Solo 401k. Note that a direct rollover, which is similar to a transfer in some ways, is still different from a transfer in that tax reporting applies.

How is a direct rollover distribution reported for income tax purposes?

The custodian or trustee processing the outgoing-direct rollover is required to report the transaction on form 1099-R using Code G- direct rollovers of a traditional IRA, SEP or SIMPLE IRA to a Solo 401k. In other words, it is treated as a distribution that is immediately rolled over. See [Treas. Reg 31.3405 (c)-1, Q&A-16]. Lastly, a direct rollover is not subject to the 60-day rule.

How is a direct rollover accomplished?

The releasing trustee or custodian can transfer benefits in a direct rollover by wire transfer or mailing of check or assets to the Solo 401k trustee, who is usually the participant. IMPORTANT: If this method is used, the check must be made payable to the named Solo 401k trustee as trustee of the Solo 401k plan. The check must also indicate for whose benefit it is. See [Treas. Reg. 1.401(a)(31)-1, Q&A-4]

 Note: The terms rollover and transfer are often used interchangeably—in many cases, incorrectly.

May a SIMPLE IRA be rolled or directly rolled over to a Solo 401k?

Yes. After the expiration of the two-year period, an individual may take a tax-free rollover of a distribution from a SIMPLE IRA to a qualified plan such as a Solo 401k plan. See [I.R.C 408(d)(3)(G)]

TRANSFER. A transfer is a way of moving money or property, tax free, from one 401k to a Solo 401k. When the trustee of Solo 401k is also the participant, he or she receives the money or property in a direct transfer. As a result, it is vital that the check is made payable to the receiving Solo 401k trustee, for example as follows: “John Do, Trustee of the ABC Solo 401k Trust”). If stock or property is being transferred in-kind (stocks, real estate, etc., rather than cash), it must be reregistered in the name of the new Solo 401k trust.

Are Transfers tax reportable on Form 1099-R?

Yes, transfers are reported to the IRS. The releasing or sending organization  generates a 1099-R-Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reflecting a distribution using code G.  Income tax withholding does not apply when moving funds from another 401k to a Solo 401k because the transaction is not considered a distribution from the 401k.

Can I receive the Transfer proceeds and deposit them?

Yes, a key component of a direct transfer is that the check is made payable to the receiving or accepting Solo 401k Trust. Thus, as long as the check is properly issued, the Solo 401k trustee may hand carry the check to the bank for deposit into his Solo 401k checking account.