Understanding Solo 401k Rollover Rules and Options

If you're a solo business owner with a 401k plan, you're probably curious about the rules surrounding solo 401k rollovers. A solo 401k rollover is a way to move your retirement savings into a different type of retirement account, like an IRA.

You can roll over a solo 401k to an IRA in a tax-free or tax-deferred manner, depending on the type of IRA you choose. The IRS sets strict rules for solo 401k rollovers, so it's essential to understand the options and requirements before making a move.

A direct rollover is the most common type of solo 401k rollover, where the funds are transferred directly from the 401k plan to the IRA. This type of rollover is tax-free and can be done in a lump sum or over a series of payments.

An indirect rollover, also known as a 60-day rollover, allows you to take possession of your retirement funds and deposit them into a new account within 60 days.

If you request your funds from an old 401(k) and haven't established a new account yet, your employer will typically give you a distribution check in your name.

You'll have 60 days from the day the distribution check was issued to deposit those funds into a retirement account.

If you fail to complete the transaction within the 60-day window, you'll be taxed and penalized if you're under age 59.

A rollover can take 2-4 weeks to complete, so be sure to plan accordingly.

You have two main options for a rollover: a direct rollover or an indirect rollover.

A direct rollover typically takes 2-4 weeks to complete.

An indirect rollover, also known as a 60-day rollover, gives you 60 days to deposit your funds into a retirement account after receiving a distribution check.

If you fail to complete the transaction within the 60-day window, you'll be taxed and penalized if you're under 59.

Vanguard doesn't charge any processing fees for rollovers. Depending on the investments you choose, there may be certain transaction or brokerage costs, which Vanguard keeps as low as possible.

You can make contributions to your IRA, subject to the IRS annual contribution limits of $7,000 for the 2024 tax year and $7,000 for the 2025 tax year.

The contribution limits increase to $8,000 for the 2024 tax year and $8,000 for the 2025 tax year if you're age 50 or older.

A rollover IRA is a type of traditional IRA that shares the same tax rules, but allows you to roll over funds into an employer-sponsored retirement plan if the plan allows it.

You can roll over funds into a traditional IRA, which means you can transfer money from a 401(k) or other employer-sponsored plan into a traditional IRA without having to pay taxes on the distribution.

If you take possession of your retirement funds and deposit them back into a retirement account within 60 days, this is known as an indirect rollover or 60-day rollover.

You'll have 60 days from the day the distribution check was issued to deposit the funds in a retirement account, or you'll be taxed and penalized if you're under age 59.

You can keep the same funds in your retirement plan, but it depends on your plan.

To move your assets, you'll want to contact your provider to see if "in-kind" or "as is" rollover is an option for you.

You'll need an updated account statement on hand to discuss with a rollover specialist.

If your plan allows it, you can contact Vanguard at 877-662-7447 to explore the possibility of holding your current investments at Vanguard.

A solo 401(k) offers two tax options: traditional and Roth. You can choose the one that suits you best.

With a traditional 401(k), contributions reduce your income in the year they are made, but distributions in retirement will be taxed as ordinary income. This might be a good choice if you expect your income to be lower in retirement.

The Roth solo 401(k) offers no initial tax break, but allows you to take distributions in retirement tax-free. This is a better option if you expect your income to be higher in retirement and/or tax brackets to be higher in the future.

You'll pay taxes and penalties on distributions before age 59 ½, unless you meet certain exceptions. It's essential to understand these rules before tapping into your solo 401(k) funds.