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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?  

Financial Planning, Retirement, Pensions, 401(k)
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July 2017

Hello,

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!

July 2017
July 2017
July 2017
July 2017