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?
I like your creative way of thinking—having an additional retirement source via Solo 401k, which I recommend to many of my solo small business owners. By asking about Solo, I assume you understood how it works, and it matches your retirement goals and needs. Like any other retirement plan, Solo 401k is a tax-deferred account, but it could be a tax-exempt if you choose a Roth 401k as the default. Unless you use Roth Solo 401k, any amount you withdraw before 59 ½ will carry a 10% early withdrawal penalty, which is in addition to your regular income tax. Thus, the bigger the amount you withdraw at your regular retirement age, such as a lump-sum scenario, the happier is for Uncle Sam.
Furthermore, because this is a Solo 401k, you’re the owner. According to the IRC code, if you’re more than 5% owner, you can’t contribute to the Solo 401k once you turn 70. However, as an employee for another company, you can continue to contribute to its 401k, which gives you a few more years of reprieve from the IRS’s forced RMD requirement.
Lastly, from an estate planning point of view, a regular 401k offers a better creditor protection than a Solo 401k as the former is regulated under the ERISA. I encourage you to talk to a CFP® to truly learn about all pros and cons before a hasty action. Best!
Advantage= saving tax deferred prior to retirement.
Disadvantage= If you take a lump sum, it is counted entirely as taxable income in one year. This could drive you into a higher than desired tax bracket, washing out most or all of the benefit mentioned above.
Yes, you can withdraw your 401(k) assets in a lump sum. The question I would ask is why you would want to do this. You would owe income taxes on the entire amount at one time. The most logical thing to do is to roll your 401(k) into an IRA, thus deferring taxes on that part of your 401(k) saving your don’t need for supplemental income in retirement.
If you have an employer, you will probably not be able to have a Solo 401(k). These are generally restricted to solopreneurs, business owners with no employees, self-employed contractors, etc.
You could look into an IRA (or ROTH IRA), though the contribution limits could be limited by the plan offered by your employer.
You could also open a taxable portfolio; one intentionally structured so as to minimize active trading. You would fund this with after-tax dollars (just like a ROTH IRA), but there would be no limit to what you put in. And with proper planning and management, your account would not be taxed until you cashed out. If this was down the road, you would be creating an event in which your withdrawals would be taxed as long-term capital gains and not ordinary income.
What are the bullet points?
1. No. You probably cannot open a Solo 401(k).
2. Maybe. You should look at a ROTH IRA first, to ensure the most tax efficient manner to withdraw funds. If your salary is too high, then look at a traditional IRA, knowing that you'll pay taxes on the withdrawal and be funds would be taxed as ordinary income (which could also put you in a high tax bracket).
3. Yes. You can open a taxable account and the withdrawal would likely be taxed as a long-term capital gain.
Techinically, you can withdraw all of your funds in a lump sum. Do you mean lump sum to roll-it over to an IRA or to just withdraw the funds into a bank account. If it's the ladder, it is not recommended for tax purposes, and if you are under 59.5 for penalty purposes. I will also say that another disadvantage of taking out of the 401k is that you will also miss out on deffered growth. If you don't need the money because you can live off your pension then invest your Solo 401k accordingly and let it grow. If you meant that you wanted to roll-it over to a Traditional IRA, then that works in terms not getting taxed or penalized. Not sure how your Solo 401k is set up or through who, so tough to give pros and cons on that. However, you would have to understand your Solo 401k platform to see if it still fits your needs.