To the Men and Women Who Want to
Quit Working One Day: The Solo 401k Plan

401k Payout Trap

How to avoid the 401k and IRA payout trap

There's a alarming exception to the general rule that it's up to you to determine whether taxes will be withheld from payments from pensions, annuities, IRAs and 401k plans.

If you take such a lump sum payment, the company is required by law to withhold a flat 20% for the IRS ... even if you are moving the money to a tax-free rollover in a Solo-k Plan. No matter that you complete the rollover within the 60 days as required by law, the IRS will still keep the 20% withholding until you file a tax return and maybe get a refund.

Also, you can’t rollover 100% of your lump sum if the IRS is holding on to 20%. Not making up the extra 20% would mean the 20% would be considered a taxable distribution, with its own tax bill.

The way out…. Simply ask that the money be sent directly to the Solo-k. As long as the check is made out to your Solo-k and not to you personally, there's no withholding requirement.