There are several ways to put money into your self-directed solo 401(k) account. It is a great vehicle to consolidate other pre-tax retirement accounts as well as reduce your taxable income and save for retirement in an asset class-diversified way. Here are your options:
In-kind transfer
An in-kind transfer entails moving the assets (non-cash assets such as stocks, mutual funds, real estate, private investments, promissory notes, etc.) from a former employer’s 401(k), 403(b), etc. to the solo 401(k) plan. This method is preferred if you do not want to liquidate your investments but still want to transfer assets to a solo 401(k). An in-kind transfer is tax free.
In-kind direct rollover
An in-kind direct rollover differs from an in-kind transfer in that assets from an IRA, not a 401(k), are transferred to the solo 401(k). Just like an in-kind transfer, non-cash assets (e.g., stocks, mutual funds, real estate, notes, private investments, etc.) are moved to the solo 401(k) as-is instead of liquidating the investments to directly roll over the cash. Keep in mind that Roth IRAs cannot be rolled over to the solo 401(k). The movement of funds from an IRA to a solo 401(k) is tax-reportable but not subject to tax withholding because assets are transferred in-kind.
Cash transfer
A cash transfer is just what it sounds like: you move cash from your former employer 401(k) to the solo 401(k) instead of assets (e.g., mutual funds or stocks). If your 401(k) is currently invested in mutual funds or stocks, etc. you first have to contact your current 401(k) provider/custodian and request that they sell your positions before proceeding with the cash transfer. A cash transfer is not taxable, and partial or full amounts may be processed. Keep in mind, you’ll want to be aware of the value of the holdings before selling them to ensure that you are not selling while they are lower (i.e., the market is down) than you want.
60-day cash rollover
Moving funds from an IRA to a solo 401(k) using the 60-day method may be the fastest of all available methods, however, it puts more pressure on you because the funds or assets are distributed to you, in your name, and mailed to you directly. You then have 60 days from the date you received the assets/check to deposit them to your solo 401(k) account in order to avoid payment of taxes and the 10% early distribution penalty (if you are under age 59 ½). This method also subjects your IRA to tax reporting but not taxes as long as the funds/assets are deposited to the solo 401(k) in a timely manner.
NOTE: The above funding methods can be processed to a solo 401(k) plan anytime and do not affect the solo 401(k) annual contribution limits. In other words, you can transfer or rollover as little or as much as you want without reducing the amount that you are allowed to contribute to the solo 401(k) annually.
Annual cash contribution
Provided you have income from self-employment and establish the solo 401(k) before your tax filing deadline, plus extension (by executing the plan documents), you can make an annual cash contribution to the solo 401(k) account before filing your tax return (by the due date, plus extension). For tax year 2020 the maximum annual contribution limit was $57,000, plus an additional catch-up amount of $6,500 if you were 50 years of age or older as of 12/31/2020. The maximum solo 401(k) contribution limit for 2021 increased to $58,000, or $64,500 if age 50 or over. The contribution limits apply separately to each solo 401(k) participant. Click on this link to learn more about the solo 401(k) contribution types and calculations. This is the only funding/contribution type that can be used as a tax deduction and decrease your taxable income from self-employment.
