Form 1040 Return-Reporting IRA, SEP and SIMPLE Direct-Rollover or Rollover to: Solo 401k | Self-Directed Solo 401k | Solo K | Individual 401k

After confirming that your SEP, SIMPLE or Traditional IRA direct-rollover or rollover to your new Solo 401k or Self-Directed Solo 401k has been properly reported on form 1099-R  by the releasing financial institution, the next step is to report the direct rollover/rollover deposit to IRS on your form 1040A or 1040 tax return. Note that form 1040EZ does not allow for reporting of direct-rollover/Rollover.

 

Direct Rollover vs. Rollover 

IRA, SEP, SIMPLE Direct-Rollover to Solo 401k plan or Individual 401k is only reportable but not taxable. 

 

IRA, SEP, SIMPLE Rollover to Solo 401k plan or Individual 401k is reportable but not taxable as long as funds are deposited to Solo 401k account within 60 days from date check was received (constructive receipt).  

The 1099-R you received will help you differentiate the direct rollover and rollover for proper reporting on Form 1040.

Visit following blog post to view 1099-R reporting chart: http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=2011-form-1099-r-ira

Forms needed to properly report direct rollover or rollover on your tax return:

• Form 1099-R (provided by releasing custodian financial institution usually by January 31)
• Form 1040A or 1040 (Note that form 1040EZ does not apply)

Links to Forms 1099-R, and 1040A and 1040

Form 1099-R: http://www.irs.gov/pub/irs-pdf/f1099r.pdf

Form 1040: http://www.irs.gov/pub/irs-pdf/f1040.pdf

Form 1040A: http://www.irs.gov/pub/irs-pdf/f1040a.pdf

What Form 1099-R Communicates

Direct Rollover:

• Box 1 reflects total distribution amount from your SEP, SIMPLE or Traditional IRA.
• Box 2a--the taxable amount, should read 0 for direct rollover since the check was made payable to your Solo 401k f/b/o your name as Trustee
• Box 7 contains code G--direct rollover

IMPORTANT: If any other code besides code 7 is listed in box 7, contact the releasing IRA institution right away to make the correction to code G. 

Rollover:

• Box 1 of the Form 1099-R reflects total distribution amount from your SEP, SIMPLE or Traditional IRA.
• Box 2a--the taxable amount, displays same amount displayed in box 1.
• Box 7 contains either code 1 if you were under age 59 1/2 or code 7 if you were age 59 1/2 or over in year of distribution.

SEP, SIMPLE and IRA Reporting on 1040 or 1040A

• Entire distribution goes on line 11a if you file Form 1040A, on line 15a if you use the long Form 1040.
• 0 goes in box 11b of Form 1040A or in line 15b if you file Form 1040 since you deposited funds in Solo 401k checking account. Remember to write "rollover" next to the amount.

Paying Plan Expenses: Self-Directed Solo 401k | Solo 401k | Individual 401k | Solo K

Since different expense types apply to Solo 401k (also known as Individual 401k or Solo K), including the plan's underlying investments (e.g., real estate), each expense type must be analyzed to determine whether the applicable expense  requires payment with self-employed revenue or Solo 401k funds. 

Solo 401k or Self-Directed Expenses Break Down

Identifiable costs--costs that can be anticipated in the course of plan administration and include the following:

• Plan administration
• Annual document maintenance fees
• Legal compliance
• Consulting
• Audits

     Who pays Solo 401k plan's identifiable costs?

Identifiable fees may be paid with self-employed revenue, Solo 401k plan assets or by and from both. However, if paid from Solo 401k plan assets, the expenses deplete your tax deferred funds that could otherwise have been compounding on a tax deferred basis  

Performance costs--costs that are unpredictable (i.e., not identifiable up front) such as the following:

• Additional legal costs needed to avoid plan disqualification and various penalties for noncompliance.
• Operational defects

    Who pays Solo 401k plan's performance costs?

The self-employed typically pay costs related to legal compliance with self-employment revenue.

Additional Information

ERISA's view on the use of plans assets to pay administrative expenses

ERISA expressly allows plan assets to be used to pay administrative expenses. [ ERISA 403, ERISA 404, 29 U.S.C. 1103, 1104, (1974) ] The payment of reasonable administrative expenses from plan assets is an exception to the prohibited transaction rules. [ ERISA 408 (b)(2), 29 U.S.C. 1108 (b)(2) (1974) ]

Advisory Opinion 2001-01A: This guidance contains illustrations to help clarify settler vs. plan expenses

 Can an employer reimburse a plan for expenses paid by the plan?

Reimbursement by employer/self-employed of expenses that were previously paid by Solo 401k plan will be considered an additional contribution to the plan.  [ Priv. Ltr Ruls. 9124034, 9124035, 9124036, 9124037 ]

Who pays fees/expenses in connection with Solo 401k alternative investments (e.g., real estate)?

Fees stemming from real estate investment require payment with Solo 401k funds, not personal funds.

Real estate investment expenses include:

• Property taxes
• Insurance
• Miscellaneous expenses such as HOA dues and repairs

 

2011 Form 1099-R IRA & QRP Direct Rollover & Rollover Crib Sheet: Solo 401k | Self Directed Solo 401k

Direct-Rollover Traditional/SEP/SIMPLE IRA Reporting IRA Direct-Rollover to a Solo 401k 1099-R Issued but not taxable	Rollover Traditional/SEP/SIMPLE IRA Reporting IRA Rollover to a Solo 401k 1099-R Issued but not taxable if rolled over within 60 days to Solo 401k	Transfer (Trustee-to-Trustee-Transfer) 401k, 403b, PSP, 457b No Tax Reporting Applies No 1099-R Issued
BOX 1 Gross distribution	BOX 1 Gross distribution
Reports gross direct rollover amount	Reports total value of all distributions taken for same reason during 2011. Reports all amounts withheld for federal and state income taxes.
BOX 2a Taxable amount	BOX 2a Taxable amount
Zero (-0-) is entered since distribution is payable directly to employer plan such as a Solo 401k	Same amount listed in Box 1 appears here
BOX 2b Taxable amount not determined/Total Dist	BOX 2b Taxable amount not determined/Total Dist
“Taxable amount not determined” should be checked Check box titled “Total distribution” if distribution totally depletes the IRA ,SEP, SIMPLE	“                                                        "                                                                    “                                                        "
BOX 4 Federal income tax withheld	BOX 4 Federal income tax withheld
No amount should be listed	Amount may be listed if you elected tax withholding on IRA distribution form
BOX 7 Distribution code(s)	BOX 7 Distribution code(s)
Code G –direct rollover of a distribution to a qualified plan such as a Solo 401k | Individual 401k,  should be entered	If under age 59 ½ Code 1-Early distribution If age 59 ½ or over, Code 7-Normal distribution

Plan Start-Up Tax Credit | Form 8881 DOES NOT Apply to: Solo 401k | Individual 401k | Solo K

Common misconception exists regarding the plan start-up credit which is only available to small employers. A small employer is defined as an employer that had 100 or fewer employees and who each received at least $5,000 of compensation from the employer for the preceding year. Therefore, since a Solo 401k | Individual 401k plan is for the self employed with no employees, it cannot claim the credit.

The rest of this blog posting explains the plan start-up credit but remember that it doesn't apply to Solo 401k or Individual 401k.

Resulting from the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, a qualified employer may take the tax credit for establishing a new qualified retirement plan.

Qualified start-up costs

Include any ordinary or necessary expenses incurred in connection with:

• establishment of plan;
• administration; or
• educating employees about the plan

Determining the Credit and Form 8881

• The credit equals 50% of start-up costs detailed above up to $500 per year for maximum of plan's first 3 years.

• Employer has option of applying 1^st year credit to year of plan establishment or to year before.

• To claim credit, qualified employer completes and attaches Form 8881, Credit for Small Employer Pension Plan Startup Costs, to its business tax return.

• The credit is permitted as part of employer's general business credit.

• Employer may not claim a deduction for the start-up costs in addition to claiming the credit.

• However, employer has option to elect not to claim the start-up credit at all.

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.

Distribution Rules Applicable to: Roth Solo 401k | Roth Self-Directed 401k | Roth Solo K

In April 2007 final regulations were issued regarding taxation of distributions from what the IRS calls designated Roth accounts, commonly known as Roth Solo 401ks or Roth Self-Directed 401ks. Since the main advantage of Roth Solo 401k is tax free and penalty free withdrawals, it is important to understand the Solo 401k Roth distribution rules.  It's important to note that if distributions are made from the Roth Solo 401k prior to end of the 5 year waiting period and one of the qualifying conditions explained below, the distribution will be considered non-qualified, resulting in taxes and possible penalties of the non basis (contribution) amounts.

Qualified vs. Non-qualified Distribution from a Designated Roth Solo 401k

Qualified Distribution is:

·       A distribution from a designated Roth Solo 401k but only after 5 year waiting window has been satisfied and the participant/trustee has reached age 59 1/2, has died, or has become disabled. 

·       A distribution from a Roth Solo 401k that falls under the qualified distribution definition is not taxable to the participant/trustee.

·        A qualified Roth Solo 401k distribution maintains its basis even when funds are transferred to another Roth 401k or to a Roth IRA; therefore, they can be distributed tax and penalty free.

Illustration

After participating in her current Roth Solo 401k for 15 years, Linda decides to retire at age 63 and start making distributions from her Roth Solo 401k. Because Linda established her Roth Solo 401k over 5 years ago and she's over the age of 59 1/2, none of the distributions that she makes from her Roth Solo 401k will be subject to income tax.

Start/End of 5 year waiting period

The 5 year waiting period commences on the first day of the Solo 401k participant/trustee's taxable year, usually January 1, for which the participant/trustee first made Roth Solo 401k contribution.

The 5 year waiting period ends after 5 consecutive years have passed.

The ordering rules for non-qualified distributions from Roth IRAs do not apply to non-qualified distributions from designated Roth accounts in Solo 401k plans.

A Solo 401k Roth distribution that is not a qualified distribution (non-qualified) is subject to the pro-rata rule. This is different than the distribution rules applicable to Roth IRAs where the ordering rules apply.

A non qualified distribution from a Roth Solo 401k results in the participant/trustee including a portion of the distribution in taxable income. To determine the non-taxable amount of the distribution, the after-tax employee contributions (salary deferrals) are divided by the entire balance in the Roth Solo 401k account. The distribution amount is then multiplied by the result.

EXAMPLE

Julie has contributed salary deferrals (after-tax employee contributions) of $20,000 to her Roth Solo 401k. The total balance of her Roth Solo 401k is now $30,000, and Julie has decided to make a distribution of $9,000. Of the distribution, amount of $6,030.00 will be tax free.  

Calculated as ($20,000 / $30,000 = .67) ($9,000 X .67 = $6,030.00)

Rolling Roth Solo 401k accounts to other qualified plans or to a Roth IRA

·         Provided the receiving qualified plan permits Roth Solo 401k rollovers, existing Roth Solo 401k funds can be moved to another qualified plan such as a 401k.  Roth Solo 401k can also be rolled over to a Roth IRA. 

The amount considered rolled over is determined differently depending if the funds were moved over as a direct rollover (trustee-to-trustee transfer) or as a rollover (60- day rollover).

If processed as a Direct-Rollover, all amounts can be deposited to another Roth 401k plan or to a Roth IRA.

If processed as a Rollover (payable to the participant and rolled over within 60 days), only earnings (taxable amounts), not the basis, may be rolled over to another Roth 401k. However, the entire amount can be rolled over to a Roth IRA.

Solo 401k: Answers to your Year-End Required Minimum Distribution (RMD) Questions

Q. Which table do I use to calculate my Solo 401k RMD?

A. For lifetime distributions to Solo 401k participant, you have two tables to choose from:

Uniform Lifetime Table—this table is usually used if the Solo 401k Plan participant is not married; or

IRS Joint Life Tables—used if the Solo 401k participant’s spouse is more than ten (10) years younger than him or her and is the sole beneficiary the entire year.

Q. I don’t have enough liquid cash in my Solo 401k | Self-Directed 401k to take my RMD because all of my Solo 401k funds are invested in real estate. What should I do?

A. The IRS still requires that you take you RMD. Therefore, you will need to re-register part of the real estate by deeding it to your personal name to satisfy RMD, and report it on form 1099-R. Alternatively, you have option to sell part of the real estate and then distribute the proceeds to satisfy the RMD.

Q. I’m over 70 ½ years old but still self-employed. Do I still have to take required minimum distribution RMD from my Solo 401k | Self-Directed 401k?

A. Yes. The IRS requires the self-employed who have a Solo 401k to take RMDs. Confusion exists with respect to those who own less than 5% of the company not having to begin making distributions until April 1^st following the year you retire, but, again, this exception does not apply to the self-employed because you typically own more than 5% of your company.  

More RMD Information

The required minimum distribution (RMD) regulations require a Solo 401k participant to begin distribution no later than his required beginning date (RBD) and to continue such distributions over a period not extending beyond the life expectancy of the participant and a designated beneficiary.

The RBD for a Solo 401k participant is April 1 of the calendar year following the later of the calendar year in which the participant attains age 70 ½. If he fails to take the RMD, he would be subject to an excess accumulation penalty equivalent to 50 percent of the amount that should have been distributed but was not.
The RMD is typically calculated by dividing the account balance by the applicable distribution period. The account balance is generally the balance as of the last valuation date in the calendar year immediately preceding a year for which an RMD is due.

Calculating my Solo 401k RMD

For existing and prospective clients, we will calculate your RMD and prepare form 1099-R, the form used for reporting distributions including RMDs from Solo 401ks at no extra cost. Please e-mail us at info@mysolo401k.net if you would like us to calculate your RMD.

Lastly, visit our following blogs for more information on RMDs and Form 1099-R reporting.

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-plan-or-individual

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=how-to-calculate-solo-401k

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=reporting-distributions-from-solo-401k

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-or-individual-401k

FDIC and SIPC Protection for: Self-Directed 401k | Solo 401k | Self-Directed Solo 401k

Retirement accounts including Solo 401k are federally insured up to $250,000 per bank.  This limit was increased from $100,000 to $250,000 by Congress in 2006.

Key Points of FDIC Coverage for Solo 401k | Self-Directed 401k

The $250,000 limit for federal deposit protection applies to Solo 401ks at banks and savings associations insured by the FDIC, and credit unions insured by the NCUA.

Pursuant to FDIC/NCUA regulations, all of one’s retirement accounts held at same insured bank are combined together and insure up to $250,000. 

Retirement accounts including Solo 401k are separately insured from other deposits held at same bank. For example, if in addition to a $250,000 Solo 401k, the participant has a $60,000 non-Solo 401k CD in her own name at XYZ bank plus a $95,000 non-Solo 401k CD at same bank in joint name with her husband, both of those accounts would be fully-insured because they’re under the $100,000-per-depositor-per –bank limit. The insurance for the non-Solo 401k accounts would be in addition to the $250,000 of insurance for retirement accounts at XYZ Bank.

FDIC Protection is Not Extended to Investments

Keep in mind that FDIC/NCUA insurance applies only to deposits such as checking accounts, savings accounts and CDs. As such, there is no federal deposit insurance for Solo 401k investments such as stocks, bonds, real estate, notes, etc.; even if they are purchased from an FDIC or NUCA insured institution.

SIPC Coverage

However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). This is an organization to which virtually all securities brokers belong. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 in cash. These reimbursements occur in cases of broker theft or the failure of a brokerage firm.

Solo 401k | Individual 401k Loan Default ad Offsets

Loan Default

For a Solo 401k plan loan (participant loan) to be granted an exemption from the IRS’s prohibited transaction rules, loan payments must be made according to a level amortized schedule with payments occurring at least quarterly. When a scheduled loan payment is not made by the end of the quarter in which it is due, the participant solo 401k loan goes into default. At this point, the plan may allow for a “cure period.” This cure period would give the Solo 401k plan participant until the end of the following quarter to catch up on payments.

Causes for Loan Default/ Distribution

A loan becomes a deemed distribution when:

 1) It has not been paid off within the maximum time frame (five years for most loans),

 2) a defaulted loan’s payments have not been caught up to date by the end of the cure period,

 3) a loan exceeds the maximum permissible amount, or

4) an event designated by the solo 401k plan, such as severance from employment, occurs.

Tax Consequences of Loan Default/Deemed Distribution

Even though a defaulted solo 401k loan is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs Insurance Contracts, etc., for the year in which the loan default (deemed distribution) takes place and normal tax consequences apply (including possible 10 percent early distribution penalty), a loan default/deemed distribution is not an actual distribution for all tax purposes.  Because this is not a true distribution, the defaulted loan cannot be rolled over into an IRA or another retirement plan. Additionally, after a deemed distribution, the loan is still considered a Solo 401k plan asset and may still be repaid. The Solo 401k loan continues to accrue interest, and that balance is used in determining the maximum loan amount available for any subsequent loans.  

Loan Offset Explained

A loan offset occurs when, under the terms of the Solo 401k plan loan, the participant’s accrued benefit is reduced by the amount of the outstanding loan (to “repay” the loan and enforce the plan’s security interest). As opposed to a loan default/deemed distribution, a loan offset is considered a distribution, the loan is no longer part of the plan assets, is not included as an outstanding loan when calculating the maximum loan available for a new loan, and cannot be repaid.

When can a loan be offset?

A defaulted loan can be offset only when there is a distribution trigger available to the participant under the plan. The participant must be eligible to take a distribution. Plans do have the discretion, however, to require loan offsets once a participant has reached a triggering event (e.g., death, disability, severance from employment) even if there has not been a default before the triggering event.

Tax Consequences of a Loan Offset

A loan offset is treated as a distribution for all tax purposes. The distribution is subject to income taxes, as well as any applicable penalty taxes, and is reported on Form1099-R. Provided that the offset takes place before a deemed distribution, it can be rolled over into an IRA or another retirement plan following the normal rollover rules.    

In-Plan Roth Rollovers aka Converting Solo 401k to Solo 401k Roth: Self-Directed 401k | Solo 401k | Individual 401k | Solo K

In-plan solo 401k Roth rollover defined

An in-plan Roth rollover is the movement of assets from your existing Solo 401k to a designated Roth Solo 401k account within your existing Solo 401k plan. Note that a Solo 401k plan is also referred to as a self-directed 401k, individual 401k or Solo K.

In-plan Roth rollovers resulted from the enactment of the Small Business Jobs Act of 2010.

Allowing for in-plan Roth rollovers

 
Only Solo 401k plans like the one offered by Mysolo401k.net that have designated Roth account option are permitted to offer in-plan Roth rollovers.

Process of doing an in-plan Roth Rollover

There are two ways to do an in-plan Roth rollover:

Direct rollover—as trustee of the solo 401k plan, by internally transferring an eligible rollover distribution from the Solo 401k plan’s non-Roth account to a designated Roth account in the same solo 401k plan, or

60-day rollover—by taking an eligible Solo 401k rollover distribution from the Solo 401k plan’s non-Roth account and subsequently depositing all or part of that distribution to a designated Roth account in the same Solo 401k plan within 60 days.

Recharacterizing (unwinding) an in-plan Roth rollover

The rules do not allow for the recharacteraztion of an in-plan Roth rollover (i.e., an in-plan Roth rollover cannot be returned to non-Roth status).

Distributions Types that qualify for in-plan Roth rollover

 1. Rollover contributions

 2.   After-tax contributions

 3. Employer profit-sharing contributions –but only when following   requirements are met:

•  Attainment of age 59 ½
• The employer contributions being converted have been in the plan for at least 2 years, or the participant has participated in the solo 401k plan for at least 5 years.

4. Salary deferrals (pre-tax elective deferrals)—only when you reach age 59 ½

Taxation of Solo 401k in-plan Roth Rollovers

Amounts processed as in-plan Roth rollovers are taxed in the same year and added to your gross income for the tax year.

In-plan Roth direct rollover is not subject to the 20% mandatory tax withholding; however, since you have to pay taxes either when you do the conversion or when you file your income tax return, it is recommended that you pay the 20% tax upfront to avoid having to increase your federal income tax withholding or make estimated tax payments to avoid underpayment of tax penalty.

The 10% early distribution tax does not apply to In-plan Roth rollovers at the time of processing. However, if withdrawn before a 5-taxable-year period the 10% may apply. Send us an e-mail at info@mysolo401k.net for more information on this.

Tax reporting in-plan Roth direct rollover

Reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc by:

• Including the amount you rolled over in box 1 (Gross distribution)
• Including the taxable amount you rolled over in box 2a (Taxable amount)
• Reporting your basis in the amount rolled over in box 5 (Employee contributions)
• Using distribution code “G” in box 7

Tax reporting in-plan Roth rollover on your tax return
You are required to:

• File Form 8606, Nondeductible IRAs, with your  tax return; and
• Complete Form 8606, Part III, to report your in-plan Roth rollover.