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Old 05-04-2021, 06:30 PM   #21
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Why would you need a PLR? Is not exception 1 at https://www.irs.gov/taxtopics/tc558 sufficient and explicit enough for you?

If you take a distribution from your 401(k) and the 1099-R is not coded correctly, all you need to do is complete Form 5329, line 2, exception code 1 for the applicable amount. This is assuming that the exception applies to you.
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Old 05-04-2021, 06:45 PM   #22
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Update: I'm now 47 months from 59.5. Last day on contract is the last day of June. 5 weeks paid leave plus 13 weeks severance will put my taxable account over 200K. I only need 2k/month until 59.5 so things are looking good. My sports officiating is in full gear with baseball and volleyball expecting over 10k this year alone. As of now I shouldn't need rule of 55, 72t or solo 401k. Can't catch on with the new company until October or I lose the severance. The team may bring me back at 20 hrs/wk for 70k. We'll see. DW would like me to work 2 more years despite my awesome power points showing us winning the game.
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Old 05-05-2021, 08:34 AM   #23
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Quote:
Originally Posted by SecondCor521 View Post
Why would you need a PLR? Is not exception 1 at https://www.irs.gov/taxtopics/tc558 sufficient and explicit enough for you?

If you take a distribution from your 401(k) and the 1099-R is not coded correctly, all you need to do is complete Form 5329, line 2, exception code 1 for the applicable amount. This is assuming that the exception applies to you.
SecondCor - Thanks for the reference. My concern is regarding documenting that I have "Separated from Service" from a Sole Proprietorship (myself).... not sure how this would be sufficiently documented to the IRS (Document sale of the business on Scheudle C, letter to the IRS indicating the business has terminated.. ?)

BTW, this nugget from the internets on a solo 401k provider's page is what has me spooked:

https://www.mysolo401k.net/age-55-ru...tirement-plan/Essentially, once you stop being self-employed, you will have to shut the plan down and transfer it to an IRA or take a full taxable distribution. For this reason (i.e., you can no longer continue with a solo 401k plan if there is no business) the age 55 rule does not apply to solo 401k plans. For this reason, we have never had a solo 401k client exercise this feature.

Q: Is the above italicized and bold quote from the Solo401k page above 'fake news'? There's nothing in my ETrade plan description warning me of this age 55 landmine.
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Old 05-05-2021, 09:04 AM   #24
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I'm no expert, just SGOTI.

Personally I do two things:

1. I always try to go to the horse's mouth on things. In this example, I would rely on irs.gov rather than any other site.

2. If I research a tax question - remember, I'm an amateur - and the IRS guidance is ambiguous, I generally take the position that if my interpretation is both reasonable in a common sense sort of way and consistent with IRS guidance, then I adopt the position and file my taxes accordingly. I accept that the IRS may audit me, may disagree with my position (and possibly provide tax guidance that I couldn't find), and assess back taxes and interest. I hope that the IRS will not assess penalties because I was being reasonable and making reasonable efforts to comply with tax law.

But (a) that's just what I do, it's not advice to you or anyone else, and (b) in your case it sounds like you have a lot more dollars at stake. So in your case you might consult with a local highly recommended CPA who has experience with sole props on that specific issue.

My knowledge about the 401(k) rule of 55 is that you have to have the separation from service and have the 401(k) plan itself allow partial withdrawals (like you want to do, presumably yearly for those five or so years). AFAIK, the separation from service doesn't have any requirement about how or why - you can quit, be fired, retire, the business closes, whatever.

So that would just leave the 401(k) plan rules allowing partial withdrawals. My *guess* is that "mysolo401k.net" doesn't have the language in their plan docs to support partial withdrawals and maybe didn't want to pay a lawyer to draft the language for them for whatever reason (cost, risk, lack of demand).

What I might try is finding a solo 401(k) provider who does provide plans which allow for partial withdrawals, then rolling your solo 401(k) from your existing one to that provider. This is assuming that your solo 401(k) plan documents don't allow partial withdrawals - you could check that first and see; maybe the language is in there.

...

I don't know all of your requirements, but if all of the above doesn't work for you, what I think I might consider (for ages 55 to 59.5) is:

1. Roll solo 401(k) to traditional IRA.
2. Split traditional IRA into two accounts, trad IRA 1 and trad IRA 2.
3. Start SEPP on trad IRA 1.
4. Supplant income from step 3 with Roth (or taxable).
5. Roth convert from trad IRA 2 to (a) manage AGI and (b) backfill Roth from step 4 withdrawals.

The math may not work, or you might not like it for whatever other reason, and getting a job at WM may be more practical. But it could work and you could end up in roughly the same place at 59.5 as you would with your plan.

...

Another option is to sell the business to someone who can keep the business operating. Presumably the 401(k) could then stay open?
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Old 05-05-2021, 10:45 AM   #25
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I researched the same issue with rule 55 for Solo 401k, and here what I got:

1. For rule 55 IRS require you to disengage from the Business that is Sponsor of 401k (Employer)
2. For Solo 401k you are the Sponsor/Employer - being Self-Employed is requirement to open Solo401k.
3. In order to disengage from Self-Employment you need officially close Business that is registered under TIN that used to open Solo 401k, you can not open Solo 401k under SSN.
4. If you close Business, your TIN becomes invalid, your Solo 401k need to be closed and funds distributed/rolled over. You can not keep Solo 401k active if business closed.

Again, that is based on my own research and some conversations with multiple Fidelity advisers couple or may be more years ago.

If someone have better answer and can provide different info - I will be happy to take.
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Old 05-05-2021, 04:03 PM   #26
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Quote:
Originally Posted by Exit 2024 View Post
I researched the same issue with rule 55 for Solo 401k, and here what I got:

1. For rule 55 IRS require you to disengage from the Business that is Sponsor of 401k (Employer)
2. For Solo 401k you are the Sponsor/Employer - being Self-Employed is requirement to open Solo401k.
3. In order to disengage from Self-Employment you need officially close Business that is registered under TIN that used to open Solo 401k, you can not open Solo 401k under SSN.
4. If you close Business, your TIN becomes invalid, your Solo 401k need to be closed and funds distributed/rolled over. You can not keep Solo 401k active if business closed.

Again, that is based on my own research and some conversations with multiple Fidelity advisers couple or may be more years ago.

If someone have better answer and can provide different info - I will be happy to take.
Exit2024 - Yes, this is exactly what has me concerned.
There's no clear IRS guidance on how to document that you have 'retired' from a Sole Proprietorship, so the consensus/safe assumption seems to be to take the brute force action to terminate the business and the EIN (and therefore the Solo 401k). Which means in this case you would be forced to take your Solo401k in one Lump Sum rather than spreading it from ages 55-59.5.

IRS Factsheet 2020-16 indicates a Sole Proprietor is to close the EIN: https://www.irs.gov/newsroom/closing...proprietorship

IRS Guidance for Closing a Business echoes this guidance (step 5 is to Cancel the EIN): https://www.irs.gov/businesses/small...ing-a-business
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Old 05-05-2021, 04:07 PM   #27
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Quote:
Originally Posted by SecondCor521 View Post
I'm no expert, just SGOTI.

Personally I do two things:

1. I always try to go to the horse's mouth on things. In this example, I would rely on irs.gov rather than any other site.

2. If I research a tax question - remember, I'm an amateur - and the IRS guidance is ambiguous, I generally take the position that if my interpretation is both reasonable in a common sense sort of way and consistent with IRS guidance, then I adopt the position and file my taxes accordingly. I accept that the IRS may audit me, may disagree with my position (and possibly provide tax guidance that I couldn't find), and assess back taxes and interest. I hope that the IRS will not assess penalties because I was being reasonable and making reasonable efforts to comply with tax law.

But (a) that's just what I do, it's not advice to you or anyone else, and (b) in your case it sounds like you have a lot more dollars at stake. So in your case you might consult with a local highly recommended CPA who has experience with sole props on that specific issue.

My knowledge about the 401(k) rule of 55 is that you have to have the separation from service and have the 401(k) plan itself allow partial withdrawals (like you want to do, presumably yearly for those five or so years). AFAIK, the separation from service doesn't have any requirement about how or why - you can quit, be fired, retire, the business closes, whatever.

So that would just leave the 401(k) plan rules allowing partial withdrawals. My *guess* is that "mysolo401k.net" doesn't have the language in their plan docs to support partial withdrawals and maybe didn't want to pay a lawyer to draft the language for them for whatever reason (cost, risk, lack of demand).

What I might try is finding a solo 401(k) provider who does provide plans which allow for partial withdrawals, then rolling your solo 401(k) from your existing one to that provider. This is assuming that your solo 401(k) plan documents don't allow partial withdrawals - you could check that first and see; maybe the language is in there.

...

I don't know all of your requirements, but if all of the above doesn't work for you, what I think I might consider (for ages 55 to 59.5) is:

1. Roll solo 401(k) to traditional IRA.
2. Split traditional IRA into two accounts, trad IRA 1 and trad IRA 2.
3. Start SEPP on trad IRA 1.
4. Supplant income from step 3 with Roth (or taxable).
5. Roth convert from trad IRA 2 to (a) manage AGI and (b) backfill Roth from step 4 withdrawals.

The math may not work, or you might not like it for whatever other reason, and getting a job at WM may be more practical. But it could work and you could end up in roughly the same place at 59.5 as you would with your plan.

...

Another option is to sell the business to someone who can keep the business operating. Presumably the 401(k) could then stay open?
SecondCor -

Unfortunately, the rollover/72t options don't provide the income that 5 years of 401k withdrawals will... anything shy of 5 years of withdrawals from the entirety of the 401k balance will have me acquiring a taste for dog food
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