Updated for 2022.
For those who own a business and self-administer their own solo 401(k), there might be a point in time when you cease business operations or sell off the business. What happens to your solo 401(k) then?
The solo 401(k) has to be terminated once there is no longer any business to sustain the plan. The question then becomes: how?
Most folks are a little foggy on that part. Allow me to explain.
You’ll need to terminate your self-administered 401(k) plan when your business is dissolved. Here’s how:
A tax professional should be included in the process. You’ll have a number of choices of what you can do with your 401(k), but you don’t want to cash it accidentally without that being your primary intention.
You’ll want to contact your plan document sponsor and make them aware of your intention to terminate your solo 401(k). Because it’s a solo 401(k), you are the trustee and you operate the plan without any third party assistance. Therefore, it’s your responsibility to ensure that you are abiding all Department of Labor and IRS guidelines in the process. You will then be provided with paperwork by your plan document sponsor.
The first thing you will need to do is report the distribution of the 401(k) to the IRS. This is true regardless of whether you roll it over into another tax-deferred vehicle like an IRA or not. If you do intend to roll it over into a non-taxable vehicle, then there will be a timeline you need to be aware of.
For those who are not simply cashing out their 401(k), the funds need to be distributed as soon as is logistically possible. That means understanding that you need to set up the IRA quickly.
You now need to tell the IRS what happened to the funds that were distributed from the 401(k). They especially want to know when it’s been distributed into another vehicle that is protected from taxes. How do you do that? You can do it on Form 1040. On line 4a you include the full amount being withdrawn. Then on line 4b write the word rollover and put a zero for the taxable amount. The IRS also asks that a statement be included with your return letting them know you rolled it over into a new qualified plan.
This form 5500-EZ needs to be filled out once your 401(k) assets exceed $250,000. It also needs to be filled out each year thereafter so long as your holdings eclipse that value. In addition, it needs to be filled out again once the funds have been distributed. It must be filled out within seven months of terminating your 401(k).
You should be all set. Your 401(k) is terminated. The assets held therein are now successfully rolled over into an IRA.
The process isn’t complicated, but it is labor intensive. Friendly reminder. The 5500-EZ must be filled out within seven months. Some folks are under the misguided assumption that it needs to be in by a specified date. That’s not true. The clock starts ticking as soon as you terminate your 401(k)!
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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