Can I withdraw all of my Solo 401(k) savings as a lump sum?
I have a very good pension plan through my employer. If I start a Solo 401(k) account on the side, could I withdraw the money as a lump sum when I retire? I will be able to live off my pension plan, so this would be a secondary source of money in retirement. What are the advantages and disadvantages of withdrawing all of my Solo 401(k) savings as a lump sum?
A Solo 401(k) account is available to business owners that do not have employees, or the only employee is an immediate family member (parent, spouse, child). Do you own a business? If you do not, a Solo 401(k) account is not available to you. However, depending on your income, you might be eligible to start a Roth IRA. Depending on your age, you can maximize the contribution at either $5,500 or $6,500 if you are 50 or over.
A Roth IRA is funded with after tax money, but tax free when you withdraw it. The rules to get the tax free withdrawal status are the withdrawals happen after age 59 1/2 and you've had the Roth account for a minimum of 5 years. Provided you meet the tax free criteria, you can withdraw as a lump sum (or periodic distributions) tax free.
Yes you could pull out your Solo 401k in a lump sum when you retire. The question would be why would you want to to do this? If you pull the money all at once it is safe to assume you will pay more taxes than if you pulled it out over time as needed.
To start a solo 401k you will need selp employed income. If this is you read this post:
Live for Today, Plan for Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart business owners across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Fiduciary Financial Planner LA blog.
It would all be taxable at once. A better alternative would be to an IRA Rollover directly into an IRA. Then you could take distributions whenever you needed them & only those amounts would be taxable. This way you could control your taxes spreading them out rather than taking one big hit. Also, while they are in a retirement plan or an IRA they are asset protected from creditors.
Hope this helps and best of luck, Dan Stewart CFA®
The only advantage of withdrawing all of your solo 401(k) savings as a lump sum is that you can convert it into cash (or whatever is left after you pay a large tax bill to the federal and state governments) and invite all your friends over to see how much money you have.
A solo 401(k) should be gradually converted into a Roth IRA, not withdrawn in a lump sum. That gives you maximum flexibility. If any assets in your 401(k) are depressed, gradually convert them a little at a time, especially those which you expect to rally the strongest. That way, you pay taxes at their valuations at the time they are converted, and all future gains in a Roth IRA will be tax-free and not subject to required minimum distributions.
Also, that way you can convert and/or withdraw each year the exact amount needed to use up your current marginal tax bracket without putting yourself into the next higher tax bracket. If you make a lump-sum withdrawal you will unnecessarily put yourself into a high tax bracket and destroy most of the advantage of putting the money in a retirement account in the first place.
If you already have a job with a pension then you likely cannot open a solo 401(k). You could, however, open an IRA and/or Roth IRA, which would serve a similar purpose.
With this IRA, the annual contribution limit is significantly lower than the 401(k), but it can still help build up your non-pension retirement resources. As long as you're over 59.5 years old you can withdraw as much of the IRA as you want, and you'd need to claim any withdrawals as regular income.
Adam Harding | Investments & Planning