Funding Methods For: Solo 401k | Self Directed 401k | Individual 401k | Solo K

In-kind transfer

An in-kind transfer entails moving the assets (non cash assets such as real estate, private investments, promissory notes, mutual funds, stocks, etc.) from a former employer or current 401k to another 401k such as a solo 401k or Individual 401k.  An in-kind transfer is preferred when you do not want to liquidate your investments but still want to transfer assets to a Solo 401k. An in-kind transfer is tax free, non tax reportable, and can be processed to Solo 401k before or after the 12/31 Solo 401k establishment deadline.

Cash transfer

Cash transfer is just what it sounds like: you move cash from your former employer 401k to a Solo 401k instead of assets (e.g., mutual funds or stocks). If your 401k is currently invested in mutual funds or stocks, you first have to contact your current 401k provider and request that they sell your mutual fund or stock positions before proceeding with cash transfer. Lastly, a cash transfer is neither taxable nor reportable to the IRS and you can process multiple cash transfers (i.e., you can move partial amounts to a Solo 401k throughout the year or the full amount at once). A cash transfer is tax free, non tax reportable, and can be processed to Solo 401k before or after the 12/31 Solo 401k establishment deadline.

In-kind direct rollover

An in-kind direct rollover differs from an in-kind transfer in that assets from an IRA not a 401k are transferred to a Solo 401k. Just like an in-kind transfer, you are moving non cash assets (e.g., mutual funds, stocks, real estate, notes, private investments, etc.) to a Solo 401k instead of liquidating the investments and then directly-rolling over cash. The movement of funds from an IRA to a Solo 401k is tax reportable but not subject to tax withholding since assets are being transferred in-kind to a Solo 401k. Lastly, an in-kind direct rollover can be processed to Solo 401k before or after the 12/31 Solo 401k establishment deadline.

60-day cash rollover 

This method of moving funds from an IRA to a Solo 401k may be the fastest of all available methods; however, it puts more pressure on you because the funds or assets are distributed to you directly and thus mailed to you. You then have 60 days from the date you receive the assets/check to deposit them to your Solo 401k in order to avoid payment of taxes and possible 10% penalty if you are under age 59 1/2. This method also subjects your IRA to tax reporting but not taxes provided the funds/assets are rolled over to your new Solo 401k timely. Lastly, the 60-day cash rollover can be processed to Solo 401k before or after the 12/31 Solo 401k establishment deadline.

NOTE: The above funding methods do not restrict you to contribution limits. Put simply, you can transfer or rollover as little or as much as you want.   

Solo 401k Funding Methods Continued

Annual cash contribution

Provided you have income from self-employment and have established your Solo 401k by 12/31 by executing the plan documents, you can fund your Solo 401k by making annual cash contribution by your tax return due date plus extensions. For tax year 2011 the maximum annual contribution limit is $49,000 for each Solo 401k participant plus an additional $5,500 per participant if age 50 or older. The maximum contribution limit for 2012 is $50,000 and the catch-up amount remains at $5,500 per participant.