solo 401k to IRA direct rollover; need to report to IRS?

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Topic Author
verythankful
Posts: 6
Joined: Sat Nov 16, 2019 9:20 pm

solo 401k to IRA direct rollover; need to report to IRS?

Post by verythankful » Sat Nov 16, 2019 10:03 pm

Hi, I am thankful for wisdom i received from this forum. Sincere thanks in advance.
My wife started a single member LLC, made some profit in 2018. Opened a solo 401k with vanguard and contributed 20k. In 2019 there was no profit. There is a possibility she may close business next year.
To simplify accounts, want to transfer solo 401k balance to IRA that way she is well prepared if she needs to close business or move out of state. From Vanguard documents, looks like she can rollover all her solo 401k balance to IRA without triggering a taxable event or penalty (both are with VG, planning direct rollover).
    1. Is it simple enough that just fill in the VG distribution form or I am missing anything?
      2. Will this trigger any reporting event such as Form 1099-R for direct rollover from solo 401k to IRA? if yes, who reports them VG or herself as employer?
        3. Can she continue to maintain and contribute to solo 401k till she closes LLC?
          4. Is there anything she is missing?

          thank you in advance.

          niceguy7376
          Posts: 2458
          Joined: Wed Jul 10, 2013 2:59 pm
          Location: Metro ATL

          Re: solo 401k to IRA direct rollover; need to report to IRS?

          Post by niceguy7376 » Sun Nov 17, 2019 10:04 pm

          Welcome to the forum. I will give you a bump to get someone else attention.
          From my experience, rollover to trad IRA is not a taxable event.

          HomeStretch
          Posts: 2873
          Joined: Thu Dec 27, 2018 3:06 pm

          Re: solo 401k to IRA direct rollover; need to report to IRS?

          Post by HomeStretch » Sun Nov 17, 2019 10:42 pm

          verythankful wrote:
          Sat Nov 16, 2019 10:03 pm
            2. Will this trigger any reporting event such as Form 1099-R for direct rollover from solo 401k to IRA? if yes, who reports them VG or herself as employer?
              3. Can she continue to maintain and contribute to solo 401k till she closes LLC?
                4. Is there anything she is missing?
                2. Vanguard should issue a 1099-R for the direct 401k-to-IRA rollover.

                3. Spouse can contribute to Solo 401k if she has self-employment income.

                4. A Form 5500-EZ/SF must be filed for plan’s final plan year when plan is terminated.

                If you are saying spouse plans to rollover all Solo 401k plan assets to an IRA and to maintain/contribute to the Solo 401k after the rollover, I don’t believe that it is possible to transfer out all plan assets prior to plan termination. Spouse should check the plan documents and with Vanguard.

                Spirit Rider
                Posts: 11871
                Joined: Fri Mar 02, 2007 2:39 pm

                Re: solo 401k to IRA direct rollover; need to report to IRS?

                Post by Spirit Rider » Sun Nov 17, 2019 10:57 pm

                A rollover of a pre-tax 401k account to a traditional IRA is a non-taxable event, but Vanguard will report it on a 1099-R. The taxpayer has to report the amount of the rollover on their Form 1040, but none of it as taxable.

                As pointed out by @homestretch you can not just do in-service rollovers of certain 401k plan assets. This can only happen after separation of service. For a one-participant 401k plan, this requires plan termination.

                Keep in mind, that if she terminates the 401k, she has until the last day of the seventh month after the 401k account balances are $0, to file a final Form 5500-EZ. There are significant penalties for being late or failing to file.

                However, if the LLC was a disregarded entity. From the perspective of the IRS, the business was a sole proprietorship. Vanguard's adoption agreement applies their Individual 401k to all control and affiliated service groups. I.e. any other businesses owned by her.

                There is no requirement to terminate the Individual 401k with the closure of the LLC. She remains a sole proprietor until she dies. The Individual 401k applies to any future self-employment.

                Topic Author
                verythankful
                Posts: 6
                Joined: Sat Nov 16, 2019 9:20 pm

                Re: solo 401k to IRA direct rollover; need to report to IRS?

                Post by verythankful » Mon Nov 18, 2019 10:02 am

                HomeStretch wrote:
                Sun Nov 17, 2019 10:42 pm
                verythankful wrote:
                Sat Nov 16, 2019 10:03 pm
                  2. Will this trigger any reporting event such as Form 1099-R for direct rollover from solo 401k to IRA? if yes, who reports them VG or herself as employer?
                    3. Can she continue to maintain and contribute to solo 401k till she closes LLC?
                      4. Is there anything she is missing?
                      2. Vanguard should issue a 1099-R for the direct 401k-to-IRA rollover.

                      3. Spouse can contribute to Solo 401k if she has self-employment income.

                      4. A Form 5500-EZ/SF must be filed for plan’s final plan year when plan is terminated.

                      If you are saying spouse plans to rollover all Solo 401k plan assets to an IRA and to maintain/contribute to the Solo 401k after the rollover, I don’t believe that it is possible to transfer out all plan assets prior to plan termination. Spouse should check the plan documents and with Vanguard.
                      Thank you HomeStretch, the vanguard doc doesn't say that plan needs to close after rollover. However it asks to make sure the plan allows in-service withdrawal. Somehow feel that documentation on solo_401k to ira transfer is low, the other way (to solo 401k has better documentation)

                      Topic Author
                      verythankful
                      Posts: 6
                      Joined: Sat Nov 16, 2019 9:20 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by verythankful » Mon Nov 18, 2019 10:11 am

                      Spirit Rider wrote:
                      Sun Nov 17, 2019 10:57 pm

                      As pointed out by @homestretch you can not just do in-service rollovers of certain 401k plan assets. This can only happen after separation of service. For a one-participant 401k plan, this requires plan termination.

                      However, if the LLC was a disregarded entity. From the perspective of the IRS, the business was a sole proprietorship. Vanguard's adoption agreement applies their Individual 401k to all control and affiliated service groups. I.e. any other businesses owned by her.

                      There is no requirement to terminate the Individual 401k with the closure of the LLC. She remains a sole proprietor until she dies. The Individual 401k applies to any future self-employment.
                      Thank you Spirit Rider. Great points.
                      Looks like key is plan must allow in-service withdrawal. VG form said check section 5 of your 401k plan documentation. Which was VG document used while staring the plan. There is nothing specifically mentioned explicitly to allow or not allow in-service withdrawal. This is causing confusion. Any idea where to find if in-service withdrawal is possible for this?

                      Topic Author
                      verythankful
                      Posts: 6
                      Joined: Sat Nov 16, 2019 9:20 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by verythankful » Mon Nov 18, 2019 10:13 am

                      niceguy7376 wrote:
                      Sun Nov 17, 2019 10:04 pm
                      Welcome to the forum. I will give you a bump to get someone else attention.
                      From my experience, rollover to trad IRA is not a taxable event.
                      Thank you niceguy7376

                      panhead
                      Posts: 340
                      Joined: Fri Feb 22, 2013 10:53 am

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by panhead » Mon Nov 18, 2019 11:03 am

                      Spirit Rider wrote:
                      Sun Nov 17, 2019 10:57 pm
                      There is no requirement to terminate the Individual 401k with the closure of the LLC. She remains a sole proprietor until she dies. The Individual 401k applies to any future self-employment.
                      Spirit Rider, I know this question has popped up on this forum from time to time, but I've never seen an answer this succinct. Do I understand correctly that if one has opened a solo 401k (single participant) for when they were self employed (irregardless of whether there was an LLC or not) that there is no reason to ever terminate that plan even if one does not have any future self employed income? Is it ok with the IRS to roll other plans into the solo 401k even after contributions to it have ceased? I've never officially "closed" my contracting business as the business is really just me.

                      I have a solo 401k from my contractor days many years ago and have been getting nervous that the IRS may disqualify its tax-deferred status or penalize me as I haven't had any self employed income for a quite some time. I kept it, because I don't know that I won't have self employed income in the future, and its a nice hiding place to keep $$ out of a tIRA to keep the backdoor Roth IRA cleanly available.

                      I would love to keep it, but if there are risks, it's never been clear to me what they are.

                      (I hope this doesn't qualify for a thread hijack, sorry if it does :-))

                      -Pan-

                      Spirit Rider
                      Posts: 11871
                      Joined: Fri Mar 02, 2007 2:39 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by Spirit Rider » Mon Nov 18, 2019 11:30 am

                      verythankful wrote:
                      Mon Nov 18, 2019 10:11 am
                      Thank you Spirit Rider. Great points.

                      Looks like key is plan must allow in-service withdrawal. VG form said check section 5 of your 401k plan documentation. Which was VG document used while staring the plan. There is nothing specifically mentioned explicitly to allow or not allow in-service withdrawal. This is causing confusion. Any idea where to find if in-service withdrawal is possible for this?
                      IRS regulations prohibit the in-service withdrawal/rollover of employee deferrals prior to age 59 1/2. No 401k plan document can override this. IRS regulations allow but don't require the in-service withdrawal/rollover of vested employer contributions.

                      While I do not have Vanguard's Individual 401k plan document in front of me. All Acensus based plan documents (E-Trade, Schwab, TD Ameritrade, Vanguard, etc...) usually have the same in-service withdrawal/rollover requirements.

                      You cannot do an in-service withdrawal/rollover of vested employer contributions for two (2) years after the contribution for the first five (5) years of service. Then you can do at will. However, just because the plan document allows it does not mean the custodian's policy does.

                      Topic Author
                      verythankful
                      Posts: 6
                      Joined: Sat Nov 16, 2019 9:20 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by verythankful » Tue Nov 19, 2019 1:28 pm

                      Spirit Rider wrote:
                      Mon Nov 18, 2019 11:30 am
                      verythankful wrote:
                      Mon Nov 18, 2019 10:11 am
                      .

                      You cannot do an in-service withdrawal/rollover of vested employer contributions for two (2) years after the contribution for the first five (5) years of service. Then you can do at will. However, just because the plan document allows it does not mean the custodian's policy does.
                      Thanks again
                      So if she only wants to rollover her contribution 18.5k can she do it now? Or it will still violate the rules.
                      If she waits one more year she can safely rollover all of balance, assuming no more contribution this and next year?

                      Spirit Rider
                      Posts: 11871
                      Joined: Fri Mar 02, 2007 2:39 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by Spirit Rider » Tue Nov 19, 2019 2:33 pm

                      Spirit Rider wrote:
                      Mon Nov 18, 2019 11:30 am
                      verythankful wrote:
                      Mon Nov 18, 2019 10:11 am
                      You cannot do an in-service withdrawal/rollover of vested employer contributions for two (2) years after the contribution for the first five (5) years of service. Then you can do at will. However, just because the plan document allows it does not mean the custodian's policy does.
                      Thanks again
                      So if she only wants to rollover her contribution 18.5k can she do it now? Or it will still violate the rules.
                      If she waits one more year she can safely rollover all of balance, assuming no more contribution this and next year?
                      IRS regulations prohibit the in-service rollover of employee deferrals prior to age 59 1/2 or separation.

                      She can not rollover any of her deferrals prior to separation.

                      Topic Author
                      verythankful
                      Posts: 6
                      Joined: Sat Nov 16, 2019 9:20 pm

                      Re: solo 401k to IRA direct rollover; need to report to IRS?

                      Post by verythankful » Tue Nov 19, 2019 9:12 pm

                      In this case looks like a clean way to rollover is to close LLC, then rollover to ira...

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