As a Solo 401k account holder, there are times when you need to move money out of your Solo 401k. This may be moving money out of the pretax portion into your Roth 401k portion. Perhaps you’re moving Roth 401k funds to a Roth IRA, or even doing a distribution from your Solo 401k funds. Anytime you move money out of your Solo 401k plan, you are required to file IRS form 1099-R.
IRS Form 1099-R is used to document a distribution from your retirement plan. As your own Solo 401k plan administrator, you may use form 1099-R for a few reasons:
- In-plan Roth conversion
- Required Minimum Distributions
- Regular distribution
- Rollover to another retirement plan
- In-service distribution to a Roth IRA (as part of a Mega Backdoor Roth conversion strategy)
Will You Owe Taxes?
Some distributions from a retirement plan may be a taxable event.
- An in-plan Roth conversion may be a taxable event if you are converting pre-tax (traditional) funds to Roth
- Required Minimum Distributions will require you pay tax on the distributed funds. Regular distributions are a taxable event
- If you are under age 59.5, you will also incur a 10% early withdrawal penalty
- Rollovers to another retirement plan are generally not taxable, but you must still file form 1099-R to document the funds leaving the Solo 401k plan.
Let’s cover best practices for completing IRS form 1099-R for a number of different scenarios.
In-Plan Roth Conversion: Pretax Funds to Roth
There may be instances when you want to convert pretax 401k funds to Roth. Remember, converting pretax funds to Roth is a taxable event. Use a Roth conversion calculator to determine your potential tax liability. In this instance, you are keeping funds inside your Solo 401k plan, but they are moving from one tax-classification to another. Therefore, both the payer and the recipient are your Solo 401k trust.
In the PAYER field, enter your 401k trust name, as shown on your EIN letter. Then, enter your employer identification number (EIN). Do not enter your business information. Do not enter your social security number. The payer in this instance is your Solo 401k since that’s where funds are leaving from.
The RECIPIENT on IRS form 1099-R should also contain information for your Solo 401k trust. That’s because the funds are moving to your Solo 401k trust – in this instance from the pretax portion of the plan to the Roth 401k portion of the plan.
Both the gross distribution and taxable amount are the same in this scenario.
When you move funds from pretax to Roth, that conversion is taxable. The amount you are converting is added to your income for the year, and taxed at ordinary income tax rates.
You’ll need to enter a Distribution code in Box 7, in accordance with IRS instructions. Enter Distribution code 7 if you are age 59.5 or older for a normal distribution. Enter Distribution code 2 if you are under age 59.5. Distribution code 2 is for Early distribution, exception applies. This is because you are not charged the 10% early withdrawal penalty when converting funds in-plan to Roth.
In-Plan Roth Conversion: After-Tax Funds to Roth
If you are implementing a backdoor Roth conversion, you might make voluntary after-tax contributions to the Solo 401k plan and then decide to convert those funds in-plan to Roth.
Generally, converting after-tax contributions to a Roth 401k is not a taxable event. That’s because you didn’t claim a deduction on the initial contribution. Therefore, the IRS does not expect any taxes on the conversion.
As with the pretax to Roth conversion filing of IRS form 1099-R, both the PAYER and RECIPIENT are the Solo 401k trust (using the Solo 401k trust name, Solo 401k trust EIN, and Solo 401k trust mailing address).
The gross distribution is the amount you are converting to Roth in-plan. However, because you are converting after-tax contributions to Roth, the taxable amount in box 2a is $0. Per IRS instructions, enter the amount as -0-.
For Box 7, enter Distribution code 7 if you are age 59.5 or older. Enter Distribution code 2 if you are under age 59.5. Distribution code 2 is for Early distribution, exception applies. This is because you are not charged the 10% early withdrawal penalty when converting funds in-plan to Roth.
In-Service Distribution: Move Money to a Roth IRA
Another strategy of the Mega Backdoor Roth conversion is to backdoor funds into a Roth IRA. Simply put, the Solo 401k account holder can make large voluntary after-tax contributions to the Solo 401k plan. Those contributions are then moved to a Roth IRA via an in-service distribution.
In this instance, the PAYER is the Solo 401k trust. Enter the Solo 401k trust name, Solo 401k trust EIN, and Solo 401k trust address on IRS form 1099-R.
For the RECIPIENT, enter your name, your address, and your social security number. You do not need to enter the Roth IRA custodian information.
Similar to the after-tax to Roth conversion, the taxable amount in box 2a is -0- as you are moving after-tax funds to another after-tax account.
Use Distribution Code H in box 7, which is for a Direct rollover of a designated Roth account distribution to a Roth IRA.
Regular Distribution of 401k Funds
Once you reach age 59.5, you may begin taking withdrawals/distributions from your Solo 401k plan without penalty. If you are taking a regular distribution from pretax/Traditional 401k funds, you will pay taxes on the withdrawal. If you are taking a regular distribution from your Roth 401k, that withdrawal could be tax-free assuming the distribution is “qualified”. According to Investopedia, “To make a “qualified” withdrawal from a Roth 401(k) account, retirement savers must have been contributing to the account for at least the previous five years and be at least 59½ years old.”
If you plan to distribute funds from the pretax portion of your Solo 401k, the distribution will be added to your income and taxed at ordinary income tax rates.
Enter the PAYER as the Solo 401k trust, and include the Solo 401k trust EIN and Solo 401k trust mailing address. Because you are distributing funds to yourself personally, the RECIPIENT is you personally.
If you are taking a qualified regular distribution from your Roth 401k (you are both age 59.5 and have held funds in the account for 5+ years), enter the amount you are distributing in box 1 and enter -0- in box 2a. Always work with your accountant to verify your Roth 401k distribution is qualified and not subject to taxation.
If you are distributing funds from the pretax portion of your Solo 401k, enter the amount of the distribution in box 1 and the amount of the distribution in box 2a. That’s because you are taxed on distributions from your retirement plan.
Enter Distribution code 7 in box 7 if you are age 59.5 or older for a normal distribution.
Early Distribution of 401k Funds
For those under age 59.5, you may trigger a 10% early withdrawal penalty for removing funds from your Solo 401k plan. Follow the steps to complete IRS Form 1099-R as above with a regular distribution. However, in Box 7, enter Distribution Code 1- for an Early distribution, no known exception.
You may also be required to file IRS Form 5329 which documents the early withdrawal. Again, work closely with your accountant and/or tax preparer to ensure the 10% penalty is properly added to any taxes you may owe on the distribution.
Rollover Funds Out of the Solo 401k to Another Retirement Plan
If you are rolling funds out of your Solo 401k plan, you still need to complete and file IRS form 1099-R. The PAYER is the Solo 401k trust. Enter the Solo 401k trust name, Solo 401k trust EIN, and Solo 401k trust address.
The RECIPIENT information varies, depending on where funds will end up. If you are rolling funds out of the Solo 401k and into an IRA, you’ll enter your information (name, SSN, and address) as the recipient. If you are rolling funds out of the Solo 401k and into another qualified retirement plan, you’ll enter the new 401k plan/trust information as the recipient.
Typically when you are rolling funds out of a Solo 401k plan, they will go directly into another retirement plan. This is known as a direct rollover, or trustee-to-trustee transfer. This type of distribution is generally not taxable. Enter Distribution code G in box 7 to denote a direct rollover to another retirement plan.
Required Minimum Distributions
Once you reach age 72, the IRS requires you begin to take withdrawals from your retirement plan. These are known as Required Minimum Distributions (RMDs). The Solo 401k is not exempt from RMDs and even the Roth 401k will require the plan participant take an RMD. It’s important you work closely with your accountant and/or tax preparer to properly calculate your RMD, take the distribution, and pay any taxes owed. The IRS has helpful RMD worksheets here.
Similar to other distributions where you receive the funds, the PAYER will include Solo 401k information and the RECIPIENT will include your information. If your RMD comes from the pretax portion of your Solo 401k, you will owe taxes on the distribution. If you take the RMD from your Roth 401k, you can enter -0- in box 2a.
Enter Distribution code 7 in box 7 for your required minimum distribution.
When to File
As the plan administrator, you need to furnish a copy of the form to yourself by February 1st. The IRS needs a copy by March 1st (if you file by mail) or March 31st (if you e-file, which is highly recommended).
Where and How to File
The IRS will not accept a paper filing of IRS form 1099-R. Only approved filers on the FIRE system may file the form. There are numerous helpful online services that will file the form for just a few dollars. Some resources include: