Solo 401(k) - Withdrawals at 55

[moneyman11]

I've read the 401(k) rules that note that "distributions from your workplace savings plan are not subject to the 10% early withdrawal penalty if you are age 55 or over when you separate from service with your employer."

Does this also apply to Solo 401(k) plans?

If so, my question is, if the Solo 401(k) was set up for a sole-proprietor business, how do you properly "separate from service" in the eyes of the IRS in order to begin penalty-free withdrawals from your Solo 401(k) at age 55?

Do I simply just "declare" (is there a form to fill out?) that I am shutting down my sole-proprietorship at 55, and then I can start making penalty-free withdrawals from my Solo 401(k)?

Thanks.

 

[Alan]

Welcome to the forum.

I don't know the answer to your question. Maybe someone will be along with a suggestion or 2 for you.

 

[bentley]

Assuming you are over 55, and you terminated from said employer AFTER age 55, then you can take a penalty free withdrawal. Just remember that once you do this, you must take a lump sum distribution of all remaining assets from that employer sponsored 401k by the end of that calendar year. Unneeded funds may be rolled over into another 401k or into an IRA.

 

[moneyman11]

Thanks for the reply bentley, but please give my question another read.
I'm asking about a self-employed individual using a Solo 401(k) - not someone who has been "terminated from an employer".

In addition, I don't believe your answer is accurate. Everything I've read indicates that separating from an employer at age 55 allows withdrawals from that employer's 401(k) plan in the same manner as a 59.5 year old - lump sum distribution is not required.

 

[MasterBlaster]

Assuming you are over 55, and you terminated from said employer AFTER age 55, then you can take a penalty free withdrawal. Just remember that once you do this, you must take a lump sum distribution of all remaining assets from that employer sponsored 401k by the end of that calendar year. Unneeded funds may be rolled over into another 401k or into an IRA.

Bentley:

That's certainly true for a traditional 401k for whom you separate from being 55 or older in the year of separation. I am not so sure about the Solo 401k though. Everything I see suggests that penalties exist for Solo 401k withdrwals under 59.5. hardship withdrwals excluded.

Do you have a reference ?

 

[bentley]

Thanks for the reply bentley, but please give my question another read.
I'm asking about a self-employed individual using a Solo 401(k) - not someone who has been "terminated from an employer".

In addition, I don't believe your answer is accurate. Everything I've read indicates that separating from an employer at age 55 allows withdrawals from that employer's 401(k) plan in the same manner as a 59.5 year old - lump sum distribution is not required.

I must plead ignorant concerning the Solo 401k, but my answer is accurate as to conventional employer sponsored 401k's.

 

[bentley]

Solo 401k or Roth Solo 401k:Start Your Tax Free or Tax Deferred Retirement Now? - Solo 401k Withdrawals

scroll to bottom, hope this helps

 

[moneyman11]

I must plead ignorant concerning the Solo 401k, but my answer is accurate as to conventional employer sponsored 401k's.

Can you point me to a source for your information that says "you must take a lump sum distribution of all remaining assets from that employer sponsored 401k by the end of that calendar year" when invoking the age 55 employer separation exception?

Thanks,

 

[moneyman11]

Solo 401k or Roth Solo 401k:Start Your Tax Free or Tax Deferred Retirement Now? - Solo 401k Withdrawals

scroll to bottom, hope this helps

Thanks for the link, however while this source talks about Solo 401(k), it's section on
"Exceptions to the 10% tax penalty" goes on to state the familiar "Made to a participant after separation from service if the separation occurred after the participant reached age 55." exception, without explaining what a sole-proprietor would be "separating" from.

 

[braumeister]

As far as I can tell, withdrawals from a solo 401(k) are the same as for any other plan of this type.

If you're under 59 1/2, you can make a hardship withdrawal (for certain defined purposes), or you can withdraw the profit-sharing component of your account (subject to whatever rules are in your plan documentation). I think the profit-sharing provision is what you're looking for.

 

[Martha]

I do not have an idea as to how the IRS looks at "separation from service." One would think that not doing any more work would be sufficient but I have no idea if whether having money continue to dribble in from prior work means that you have not yet separated from service. Or, maybe the concept just doesn't apply to the self employed.


You might also want to just call your plan provider for some help.


There is nothing in the 401k rules which require a lump sum distribution as part of the age 55/separation from service rule. However, plans vary on what sorts of distributions are allowed so look at your plan.


See my signature for disclaimer.

 

[braumeister]

Here's a link to get you started:
Solo 401k or Roth Solo 401k:Start Your Tax Free or Tax Deferred Retirement Now? - Solo 401k Withdrawals

 

[moneyman11]

Here's a link to get you started:
Solo 401k or Roth Solo 401k:Start Your Tax Free or Tax Deferred Retirement Now? - Solo 401k Withdrawals

That link was already provided in this thread, and I commented on it's contents.

 

[moneyman11]

There is nothing in the 401k rules which require a lump sum distribution as part of the age 55/separation from service rule. However, plans vary on what sorts of distributions are allowed so look at your plan.

Thank you Martha ... I too had never heard the "lump sum" rule that was mentioned earlier, and can find no evidence of it anywhere.

In fact the actual IRS web site simply says:

Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. ....

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Source: Publication 560 (2009), Retirement Plans for Small Business


As I said, the conundrum I have is that I cannot find where the IRS defines "separation from service" as it pertains to a sole-proprietor with a Solo 401(k).

I guess perhaps a call to the IRS is in order.

 

[Martha]

Don't rely on anything someone at the IRS tells you by phone. Sorry, but they can't be bound by what they say.

Regarding the age 55 rule for solos, from a quick Google I found this very brief discussion: TaxAlmanac - A free online tax research resource and community - Discussion:401k distribution age 55 separation from service which says:

BNA Tax Management Portfolio 370-3d, Qualified Plans — Taxation of Distributions, X, D, 1, c, (6), says, without citation, that the age-55 exception "is not available to early distributions to self-employed individuals, because the 'separation from service' concept has no application to such individuals." I haven't seen anything similar with respect to 10% owners.
Sec. 72(t)(3)(A) explicitly denies the exception for "individual retirement plans"; it would be natural for it to extend the denial to self-employed qualified plans if it meant to. Similarly, sec. 402(d)(4)(D) (flush text) explicitly excludes self-employed people for purposes of age-55 separation from being eligible for the net realized appreciation rule.
The only places in sec. 72 that refer to the definition of "employee" in sec. 401(c)(1) are sec. 72(m)(2) (flush text), which applies just for the purposes of that sentence, and in 72(m)(6), which only applies with respect to (m); on the other hand, all of sec. 72(t) makes no sense as applied to self-employed qualified plan sponsors if they are not "employees."




There is a thread on the Fairmark forum that touches on the issue with no conclusion: http://fairmark.com/forum/read.php?2,22475,22525#msg-22525

A poster said:
I too have never seen anything conclusive on the age 55 question. At this point, I'm leaning toward an interpretation that allows a self employed person to use the age 55 exception to the 10% early distribution penalty. The statute indicates that the term 'employee' includes the self employed, 'for purposes of this subsection' 72t,


You need to ask your tax advisor. You might also post your question on the Fairmark forum. http://www.fairmark.com/forum/ Actually, I just posted the question there because it is bugging me.

 

[moneyman11]

Martha, thanks so much for following up with your research. That is the most extensive info on the topic I've seen yet. I'll be interested to hear what the folks at Fairmark have to say about it. Thanks again.

 

[Dimsumkid]

Thank you Martha ... I too had never heard the "lump sum" rule that was mentioned earlier, and can find no evidence of it anywhere.

In fact the actual IRS web site simply says:

Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. ....

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Source: Publication 560 (2009), Retirement Plans for Small Business


As I said, the conundrum I have is that I cannot find where the IRS defines "separation from service" as it pertains to a sole-proprietor with a Solo 401(k).

I guess perhaps a call to the IRS is in order.

I'm wondering if what you're looking to do is clarify separation as in filing the formal end of plan participation in your retirement plan contributions. This may be filing form 5500 or 5500ex final plan documents. Depending on your asset levels, if you're over $100k, you need to file these annually. I've been considering closing mine plans out, maybe this is something you need to look at too? This is the only way I know to announce your "retiring" from self employment to the IRS. In my situation, I'm not over 55, so my only viable option(s) are rule 72T and 72Q, equal withdrawals, maybe even hardship rules (just as an excuse to avoid the penalty).

 

[Animorph]

Sounds like a big gray area. You'd probably have some chance at success if you had no Schedule C income reported and no Solo 401k contributions after your "separation".

 

[Martha]

I got one response so far to my Fairmark post:

My question:

Anyone have any guidance as to whether the exception for the 10% early withdrawal penalty when you separate from service at age 55 applies if you are self employed and have a solo 401k? If so, how could one be sure that they are separated from service?

And what would be the applicable regulation?

An answer:

Good question. There is no clear guidance from the IRS on this subject. The employee situation is not a problem because the solo k owner is also considered to be an employee.

But the "separation from service" is an issue because there is no firm definition when a solo propreitor is separated or even if the concept applies to a sole proprietor. At the very least, you would have to terminate the plan and the business, and report the business termination on your tax return's appropriate schedule. And you would still would not be totally secure. You could report the exception on Form 5329, but could not feel secure about it until at least 3 years pass.

Fairmark Forum :: Retirement Savings and Benefits :: solo 401k

Tough one, eh?