We have discussed at length the advantages of a solo 401k. But now that you have set up a plan, it comes time to fund it.
There are several options when it comes to funding a solo 401k. Let’s take a quick look at 5 options.
Solo 401k Funding Option #1: In-kind Transfers
This is where assets like real estate or private investments, are moved from one employer 401k to another 401k such as a solo 401k plan. This transfer is best when liquidation of investment is not required, yet assets have to be transferred to a solo 401k. An in-kind transfer is not charged any taxes and can be processed to a solo 401k plan before or after the deadline to establish the solo 401k, normally Dec 31.
Solo 401k Funding Option #2: Cash Transfer
This is where only cash, not assets like mutual funds, are moved from former employer 401k to a Solo 401k. One has to communicate with the current 401k provider to request that their investment is sold before proceeding with the cash transfer. Partial or full investment may be processed and are also not taxable. Like In-kind transfers, cash transfers can also be processed before or after the Solo 401k or cash balance establishment deadline.
Solo 401k Funding Option #3: In-kind Direct Rollover
The difference between the In-kind direct rollover and In-kind transfer is that assets from an IRA, not a 401k, are transferred to a Solo 401k. There is no need for liquidation as non-cash assets like real estate or mutual funds are moved to the solo 401k. a tax report must be filed for this movement but is not subject to withholding tax because assets are transferred in-kind to a Solo 401k. Processing can also be done before or after the deadline to establish the Solo 401k.
Solo 401k Funding Option #4: 60-Day Cash Rollover
This is the fastest method to move funds from an IRA to a Solo 401k. However, it comes with increased pressure as distributions are made and mailed to you, you will only have a 60-days period to deposit the check to your Solo 401k for you to avoid imposed taxes and a 10% penalty for early distribution for an individual younger than 59.5 years.
This transfer also requires a tax reporting but will not impose any tax if the rollover is done within the required timelines. The rollover can also be processed before or after the deadline to establish Solo 401k.
Solo 401k Funding Option #5: Annual Cash Contribution
This is available for those with income from self-employment. After establishing the Solo 401k by its deadline, The Solo can be funded through annual cash contributions by your business tax return date plus extensions. The contributions, however, have limits, for example, $54,000 for the year 2017 plus a catch-up amount of $5,500.
Note – In-kind transfers, Cash Transfers, In-kind direct rollover, and the 60-day cash rollover do not affect the solo 401k annual contribution limits. One has the freedom to transfer or rollover any level of the fund without affecting their annual Solo 401k contribution limit.