55 rule and SOLO 401k thoughts

[SecondCor521]

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.

[Bigdawg]

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.

[ejw93]

Quote:

Originally Posted by SecondCor521 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.

[SecondCor521]

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?

[Exit 2024]

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.

[ejw93]

Quote:

Originally Posted by Exit 2024 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

[ejw93]

Quote:

Originally Posted by SecondCor521 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

[HenryD]

Quote:

Originally Posted by Exit 2024 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.

Thank you. Disappointing to read, but it is logical. Looks like I'll have to go back and dust off my 72(t) plans.

[pb4uski]

What if you gutted the business so it was only a shell (no remaining assets or liabilities) and sold the shell to a trusted friend or relative (but not your spouse).... and they just keep the shell for 4 1/2 years (from when you are 55 until you are 59 1/2)?

You are disconnected from the business but the business and TIN still exist.

Another possibility might be to get a job that has a 401k, roll the solo 401K into the 401k if that is possible, and then quit after your 55.

[ejw93]

Quote:

Originally Posted by pb4uski What if you gutted the business so it was only a shell (no remaining assets or liabilities) and sold the shell to a trusted friend or relative (but not your spouse).... and they just keep the shell for 4 1/2 years (from when you are 55 until you are 59 1/2)? You are disconnected from the business but the business and TIN still exist. Another possibility might be to get a job that has a 401k, roll the solo 401K into the 401k if that is possible, and then quit after your 55.

pb4 - That's a brilliant idea!
In my case the business is a Sole Proprietorship and the EIN/TIN cannot be transferred.
....BUT I could sell the business to the new owner under the condition that I am on payroll for a while and the new business will have a multiple-member 401k plan ("SIMPLE" or "Traditional" business 401k)... Intriguing option.

[pb4uski]

I wonder if you could you transfer the business to a newly created LLC that would have a TIN different from your SSN and then sell the LLC shares?

[jydog]

So you could not transfer the business (LLC) to your spouse to keep the 401k alive?

[Markola]

Personally, rather than all this complication, I might instead just wait until the oldest spouse is within spitting distance of 59.5, quit, then pay the 10% penalty for a couple of years. It ought to be possible to cut 10% out of overall spending temporarily to offset the penalty. And I’d prefer to pay a little penalty and sleep well rather than engage in risky, questionable solo 401k gymnastics in trying to fool the IRS.

[jydog]

Quote:

Originally Posted by Markola Personally, rather than all this complication, I might instead just wait until the oldest spouse is within spitting distance of 59.5, quit, then pay the 10% penalty for a couple of years. It ought to be possible to cut 10% out of overall spending temporarily to offset the penalty. And I’d prefer to pay a little penalty and sleep well rather than engage in risky, questionable solo 401k gymnastics in trying to fool the IRS.

Or the IRS could provide a clear answer to this so we would not have to guess. So the answer is just give 10% of your hard earned money away because it is too complicated?

[Markola]

The whole federal tax-deferred savings structure, in which we participate voluntarily, is built around incentives to access those savings at 59.5 or after. I haven’t read anywhere that it’s the IRS’ duty to make it easy for everyone to access their tax-deferred assets before that. That would defeat the purpose of tax deferral, wouldn’t it?

[jydog]

That structure is to promote savings for those who cannot discipline themselves. This intern penalizes savers who are more prudent and ahead of the game. Yes they do have rules for accessing tax-deferred accounts early. What do you think they have the rule of 55 and 72t? The problem is people who are self employed do not have a clear path to access a 401k like corporate employees do.

[Markola]

Quote:

Originally Posted by jydog The problem is people who are self employed do not have a clear path to access a 401k like corporate employees do.

My comment addressed the OP’s situation. The OP and his DW sound like they are employed enough to have corporate, not self-directed, 401ks, since they had to research the Rule of 55 with HR or someone.

[Bigdawg]

Quote:

Originally Posted by Markola My comment addressed the OP’s situation. The OP and his DW sound like they are employed enough to have corporate, not self-directed, 401ks, since they had to research the Rule of 55 with HR or someone.

OP here. Good discussion. Thanks Everyone. Latest update: Sort of looking for an easy stay at home job. I still have 12K of the severance. Taxable account is still increasing. Contract for deed is paying me (5%) for the next 10+ years. The guy has expressed interest in paying me off now. Outstanding balance is just over 60K. Sports officiating side hustle is paying well. Only reason for a job would be to keep DW happy. Scuba dove Roatan in Septemebr. Heading to St Croix in November. DD getting married in Nov of 2022.

Haven't moved the 401k from the job yet. Waiting a few more months to see how this all works out. It's in Fidelity and the fees are low. 41 months until age 59.5 with plenty of taxable there if I need it. Shouldn't need to touch it.