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55 rule and SOLO 401k thoughts
Old 09-30-2020, 07:37 AM   #1
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55 rule and SOLO 401k thoughts

Took me 21 months to get a straight answer (and the actual SPD). The good news-I can use 55 rule. Bad news-one time lump sum only. I could do something like, on a 100K for example, take a rule of 55 distribution of 50k (IRS exemption of 10% penalty) and rollover the other 50k into an IRA. But, that would sting me with a hypothetical 12k tax hit. DW still works and we would be into the 24% bracket.

Here is one possible strategy: Pick up with new company after this contract (sometime between 12 Dec 2020 and spring of 2021) as a 1099 contractor-set up solo 401K-rollover previous 401k into this solo 401k and then when I retire at say 56-57 I will have full rule of 55 access to the solo 401k. Thoughts?, Holes? Did I miss something? BTW I do not have to go with new contract (and solo 401k) because I already get 1099 $ via sports officiating. I haven't set the solo 401k up yet. Need to do that soon. Also we are sitting pretty good with home equity, taxable account and like I mentioned DW still works (2 more years).

These are all back up plans to the back up plans. As is we are FI and the planned budget works. My back up plans are to cover the potential "what ifs".
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Old 09-30-2020, 08:03 AM   #2
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First, I am not an expert. I don't understand. Why would you want to roll over the full 401K into a Solo 401K. Why not roll it over into an IRA? You could then take out whatever you needed, as you needed and only pay taxes on what you took out. Solo 401K's have high costs from what I read.

BTW, if you haven't already, open a Roth IRA even if it is with $100 to start the 5 year clock.
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Old 09-30-2020, 08:18 AM   #3
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401k to tIRA means penalty-free access is 59 1/2, whereas the idea was penalty free access at 55. And also partial vs complete withdrawals.

If the access to the funds is only for an unexpected contingency and is unlikely, there might be other, less complicated choices.

For instance, you could open a HELOC and not draw on it. If the rare thing happens, spend from that.

My first thought was that the solo 401k sounded complicated, but I don't know enough about them to say.
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Old 09-30-2020, 08:56 AM   #4
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Misc thoughts:

If these are backup-to-the-backup plans, then presumably you wouldn't take the rule of 55 distribution unless your financial situation were significantly changed, so the 24% tax bracket would likely not be an issue.

Does the current 401k allow loans to participants who are former employees?

If you do go with a solo 401k, you'll still have to follow the SPD, so you may need to shop around to find a custodian that offers plans with an SPD that allows multiple rule of 55 withdrawals.

If you needed money for deductible medical expenses (exceeding 7.5% or 10% of income), or because you are disabled, then you can make a penalty free withdrawal.
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Old 09-30-2020, 09:07 AM   #5
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Is the one-time lump sum only option available you at any time of your chosing after you leave service at 55? Do you expect your marginal tax bracket to be less than 24% once your wife stops working?

As I recall you have substantial other assets so why are you so keen to do a withdrawal?
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Old 09-30-2020, 09:51 AM   #6
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Is the one-time lump sum only option available you at any time of your chosing after you leave service at 55?(YES) Do you expect your marginal tax bracket to be less than 24% once your wife stops working? (probably not)

As I recall you have substantial other assets so why are you so keen to do a withdrawal?(We do)
Contract currently ends on 12 December. If I take the whole current 401(k) as a lump sum I would have to pay taxes on it in 2020. DW and I will gross 350K in 2020 before the lump sum of about 70k. That 70k would be taxed at the 32% rate. If the contract extends into 2021 (there is a protest) then I would be taxed at 24%. So about 17k in taxes. I guess that is doeable. Throw that all into the taxable account and be done with it.

Thanks for the responses. I turn 55 on Saturday. DW is 48 (49 in Nov) and wants to work until at least August of 2022. I may just keep my easy gig (if new contractor picks me up) until DW is done. Then we are only 30 months or so from 59.5 for me. First world problems but proplems nonetheless.

Someone mentioned the SPD in a solo 401(k). Would there even be an SPD in a solo 401(k) Doesn't Vanguard/Fidelity, etc... just have canned solo 401(k)'s set up for 1099 folks?
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Old 09-30-2020, 09:55 AM   #7
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My thoughts, rollover to an IRA, because of the CARES Act, you can take out 100K now penalty free, you pay the tax over the next three years on the 100K, if I understand correctly ---- This would carry you for a bit for the what ifs
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Old 09-30-2020, 09:57 AM   #8
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Originally Posted by sengsational View Post
401k to tIRA means penalty-free access is 59 1/2, whereas the idea was penalty free access at 55. And also partial vs complete withdrawals.

If the access to the funds is only for an unexpected contingency and is unlikely, there might be other, less complicated choices.

For instance, you could open a HELOC and not draw on it. If the rare thing happens, spend from that.

My first thought was that the solo 401k sounded complicated, but I don't know enough about them to say.
Bold above is mine. There is the rule of 72t for IRA's which allows penalty free withdrawals (5 consecutive years minimum or up to age 59-1/2 whichever comes first). I don't know if or how the contributions vs growth in the 401K would transfer over to the IRA. Probably not. But if so, then the contributions can be withdrawn at any time penalty free.
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Old 09-30-2020, 10:00 AM   #9
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My thoughts, rollover to an IRA, because of the CARES Act, you can take out 100K now penalty free, you pay the tax over the next three years on the 100K, if I understand correctly ---- This would carry you for a bit for the what ifs
Hmm, interesting. I'll have to look into that. Thanks
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Old 09-30-2020, 10:03 AM   #10
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Bold above is mine. There is the rule of 72t for IRA's which allows penalty free withdrawals (5 consecutive years minimum or up to age 59-1/2 whichever comes first). I don't know if or how the contributions vs growth in the 401K would transfer over to the IRA. Probably not. But if so, then the contributions can be withdrawn at any time penalty free.
I don't want to roll into IRA because I may want the $ prior to 59.5. I am aware of 72t. Don't like the 5 year lock in. I want full access if possible.
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Old 09-30-2020, 10:13 AM   #11
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Quote:
Originally Posted by LakeRat1 View Post
My thoughts, rollover to an IRA, because of the CARES Act, you can take out 100K now penalty free, you pay the tax over the next three years on the 100K, if I understand correctly ---- This would carry you for a bit for the what ifs
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Originally Posted by Bigdawg View Post
Hmm, interesting. I'll have to look into that. Thanks
One needs to meet some pretty specific criteria in order to qualify for the penalty free withdrawals under the CARES Act.

Quote:
How do you qualify for the exemption?
  • You, your spouse, or dependent was diagnosed with COVID-19 by a CDC-approved test , OR
  • You experienced adverse financial consequences as a result of certain COVID-19-related conditions, such as a delayed start date for a job, rescinded job offer, quarantine, lay off, furlough, reduction in pay or hours or self-employment income, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury.
A coronavirus-related distribution is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.
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Old 09-30-2020, 10:16 AM   #12
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Contract currently ends on 12 December. If I take the whole current 401(k) as a lump sum I would have to pay taxes on it in 2020. DW and I will gross 350K in 2020 before the lump sum of about 70k. That 70k would be taxed at the 32% rate. If the contract extends into 2021 (there is a protest) then I would be taxed at 24%. So about 17k in taxes. I guess that is doeable. Throw that all into the taxable account and be done with it. ....
I'd wait until you have headroom in the 24% tax bracket... I'm thinking that you'll save $5,600... right? $72k*(32%-24%).
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Old 09-30-2020, 10:23 AM   #13
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I'd wait until you have headroom in the 24% tax bracket... I'm thinking that you'll save $5,600... right? $72k*(32%-24%).
Makes sense. One thing that I have to look into is the timeline. IF the contract ends on time in December, can I wait until 2021 to take the lump sum? If so then I will pay the 24% vice the 32%.
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Old 09-30-2020, 10:23 AM   #14
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Originally Posted by cathy63 View Post
Does the current 401k allow loans to participants who are former employees?
I didn't think this was possible because I thought 401(k) loans had to be paid back after separation of service. But since it's @cathy63 saying it, I believe you.

Quote:
Originally Posted by Bigdawg View Post
Someone mentioned the SPD in a solo 401(k). Would there even be an SPD in a solo 401(k) Doesn't Vanguard/Fidelity, etc... just have canned solo 401(k)'s set up for 1099 folks?
I think ERISA requires all 401(k)s to have an SPD. Vanguard/Fidelity might have a canned one, I would think they would but never needed to look.

You also want an SPD which allows incoming rollovers of previous 401(k)s for this plan to work. Seems like they should, but I've read that some plans don't, so might as well cross the t's and dot the i's.

One other thing to check is that I think 401(k)s have administrative fees associated with them. These are usually paid for by the employer, but in a solo 401(k) situation they'd logically be paid by you. Hopefully the fees aren't too bad, but something else to consider and shop around for.

Quote:
Originally Posted by LakeRat1 View Post
My thoughts, rollover to an IRA, because of the CARES Act, you can take out 100K now penalty free, you pay the tax over the next three years on the 100K, if I understand correctly ---- This would carry you for a bit for the what ifs
OP would have had to have been affected directly by the coronavirus (see the CARES Act for details) in order to take the $100K out. OP will have to decide if they qualify. Good idea though.

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Originally Posted by CRLLS View Post
Bold above is mine. There is the rule of 72t for IRA's which allows penalty free withdrawals (5 consecutive years minimum or up to age 59-1/2 whichever comes first). I don't know if or how the contributions vs growth in the 401K would transfer over to the IRA. Probably not. But if so, then the contributions can be withdrawn at any time penalty free.
I know OP already said that they're not interested, but just to comment:

Rolling a 401(k) to a traditional IRA is a non-taxable event. Then withdrawals from the IRA are all taxed at ordinary income tax levels (plus potentially a 10% penalty if under 59 1/2). It doesn't matter whether it's contributions or growth; the tax law considers the traditional IRA to be one big black box pile of dollars.

Your comment about contributions being withdrawn penalty free is true of Roth IRAs, not traditional IRAs. Depending on if OP and spouse have Roth IRAs and depending on how much they contributed to those accounts over the years, that would be a (probably small) pot of money they could tap for the 55 to 59.5 bridge.
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Old 09-30-2020, 10:39 AM   #15
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I didn't think this was possible because I thought 401(k) loans had to be paid back after separation of service. But since it's @cathy63 saying it, I believe you.



I think ERISA requires all 401(k)s to have an SPD. Vanguard/Fidelity might have a canned one, I would think they would but never needed to look.

You also want an SPD which allows incoming rollovers of previous 401(k)s for this plan to work. Seems like they should, but I've read that some plans don't, so might as well cross the t's and dot the i's.

One other thing to check is that I think 401(k)s have administrative fees associated with them. These are usually paid for by the employer, but in a solo 401(k) situation they'd logically be paid by you. Hopefully the fees aren't too bad, but something else to consider and shop around for.



OP would have had to have been affected directly by the coronavirus (see the CARES Act for details) in order to take the $100K out. OP will have to decide if they qualify. Good idea though.



I know OP already said that they're not interested, but just to comment:

Rolling a 401(k) to a traditional IRA is a non-taxable event. Then withdrawals from the IRA are all taxed at ordinary income tax levels (plus potentially a 10% penalty if under 59 1/2). It doesn't matter whether it's contributions or growth; the tax law considers the traditional IRA to be one big black box pile of dollars.

Your comment about contributions being withdrawn penalty free is true of Roth IRAs, not traditional IRAs. Depending on if OP and spouse have Roth IRAs and depending on how much they contributed to those accounts over the years, that would be a (probably small) pot of money they could tap for the 55 to 59.5 bridge.
You are correct. I had a momentary brain fart. Sorry for the mis-information I presented.
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Old 09-30-2020, 11:06 AM   #16
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I didn't think this was possible because I thought 401(k) loans had to be paid back after separation of service. But since it's @cathy63 saying it, I believe you.
I was actually asking a question. I really don't know anything about 401k loans except that there was some change in the TCJA that affected repayments. It does make sense that loans wouldn't be allowed after termination of employment.
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Old 09-30-2020, 11:13 AM   #17
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I have had Solo 401k's, including a Roth 401k, from E*Trade. No fees, normal brokerage access for the most part. Fidelity was similar but didn't have a Roth option at the time. Setting one up is pretty easy. There is a canned set of documents with some checkboxes you can use to select some features. Had to re-sign the docs every few years if they changed something. They issued dire warnings about the 401k falling apart if you failed to sign the new documents on time, but I never had any problems with them.
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Old 09-30-2020, 05:03 PM   #18
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.

One other thing to check is that I think 401(k)s have administrative fees associated with them. These are usually paid for by the employer, but in a solo 401(k) situation they'd logically be paid by you. Hopefully the fees aren't too bad, but something else to consider and shop around for.

..
I have a Vanguard solo-401K (regular and roth).

OP does need to check the rules with Vanguard or Fidelity , etc... as they are different. I opened mine with Vanguard knowing it didn't allow rollover of rollover-IRA's into it. As I figured I didn't really need it.

As for fees, I know Vanguard charged me $20 per year, but I think they stopped that. In any event the fee is so minor it's not worth remembering, and the value to me was worth $20.

OP - It did take over a month to open the solo-401K, AND opening it in 2020 means it can be used in 2021, so check on the timing of usage when calling around.
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Old 10-01-2020, 10:09 AM   #19
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I was actually asking a question. I really don't know anything about 401k loans.....


Really? I see your sig and assume itís gospel. I was glad it was posted as a possible solution since I think 401k loans are not always evil and very suitable for emergency funds. Some plans do not require repayment at time of separation and some plans even permit new loans. Itís rare but my plan has both provisions. I was pleasantly surprised since those details were not obvious when I read the SPD.
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