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

Solo-k Withdrawals

Solo 401k In-Service Withdrawals

 

Your Solo 401k Plan provides for in-service withdrawals. An in-service withdrawal occurs when you take funds from your Solo 401k plan account while you are still employed and maintaining your Solo 401k plan.

 

RULES REGARDING IN-SERVICE WITHDRAWALS

 

            (a) Form of Withdrawals.  All distributions of amounts withdrawn shall be made in the form of a single sum and shall be paid in cash.

 

            (b) Active Employment.  Only Employees shall be eligible to receive in-service distributions

 

            (c) Ordering Rule. You, as the plan administrator, determine the ordering rule for in-service distributions. Such ordering rule may provide that the Participant may elect to have payments made first or last from his Roth Elective Deferral Account or Voluntary Contribution Account or in any combination of such accounts and any other Account.

 

            (d) Rollover Account.  A Participant may receive a distribution from the vested portion of his Rollover Account only to the extent such account was not transferred from another qualified plan of the employer.

 

 

There are several types of in-service asset withdrawals; each with its own restrictions:

 

1.Deferral withdrawals for Financial Hardship

 

2.Profit Sharing withdrawals of assets aged at least 2 years or 5 years participation

 

3.Rollover withdrawals are unrestricted

 

4.Required minimum withdrawals at age 70 1/2

 

            Deferral Withdrawals

 

Deferral withdrawals can be made from your Solo 401k Plan but the plan must have specific reasons for the withdrawals. 

For a withdrawal from a 401(k) plan to be on account of financial hardship, it must be made due to an immediate and heavy financial need and the amount must be adequate to satisfy the financial need. The financial need can include the needs of the participant's spouse, beneficiary or dependents as well. A withdrawal is considered necessary to satisfy both an immediate and heavy financial need if:

(1) the participant has made all other currently available withdrawals and loans under the Solo 401k Plan and any other plans sponsored by the employer or related companies;

(2) the participant is restricted from making elective deferrals to the solo 401k plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship withdrawal.

 

A withdrawal is not considered necessary to satisfy an immediate and heavy financial need if the participant has other resources available to meet the need.

Whether a need is immediate and heavy depends on the facts and circumstances.

 

The IRS has determined certain expenses to be immediate and heavy, including:

 

(1) certain medical expenses;

(2) costs relating to the purchase of your principal residence;

(3) tuition and related college fees and expenses;

(4) payments necessary to prevent eviction from, or foreclosure on, your principal residence;

(5) burial or funeral expenses; and

(6) expenses for the repair of damage to your principal residence.

 

Expenses for the purchase of a yacht or HDTV or to pay the IRS taxes owed will not qualify for a hardship withdrawal. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the participant. A hardship withdrawal may not exceed the amount of the participant's need. But, it can include the amount required to satisfy the financial need and can include amounts necessary to pay any withholding taxes or early withdrawal penalties that may result from the withdrawal.

A 401(k) plan that provides for hardship withdrawals must specify what information must be provided to demonstrate a hardship.

 

Your Solo 401(k) plan uses the "deemed necessary" rules, so that questions about the participant's financial status is not required.

 

You can rely on the participant's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, you cannot rely on an participant's representation if the employer has actual knowledge that the participant's need can be relieved:

(1) through reimbursement or compensation by insurance;

(2) by liquidation of the participant's assets;

(3) by stopping elective contributions or participant contributions under the plan;

(4) by other currently available withdrawals(such as plan loans) under plans maintained by the employer or by any other employer; or

(5) by borrowing from commercial sources.

However, you are not required to take self penalizing actions. As an example, the need for funds to purchase a principal residence cannot be relieved by a plan loan if the loan would disqualify you from obtaining other necessary financing.

 

 

The amount of elective contributions available for a hardship withdrawal cannot be more than the amount of the participant's total elective contributions, including designated Roth contributions, as of the date of withdrawal reduced by the amount of previous withdrawals of elective contributions.

 

 

After you receive a hardship withdrawal of elective deferrals from the 401(k) plan, regulations provide that you will be prohibited from making deferrals to the plan for at least 6 months after receipt of the hardship withdrawal.

Hardship withdrawals are includible in gross income unless they consist of designated Roth deferrals. They may also be subject to an additional tax on early withdrawals of elective deferrals.

 

Unlike loans, hardship withdrawals are not repaid to the plan. Thus, a hardship withdrawal permanently reduces your account balance in the plan.

 

A hardship withdrawal cannot be rolled over into an IRA or another qualified plan to avoid the premature withdrawal penalty.

 

          Profit Sharing Withdrawals

 

The Profit Sharing component of your Solo 401k plan allows in-service withdrawals. Unlike other plans which may only make distributions upon termination of employment, attainment of the plans normal retirement age or plan termination, your profit sharing component has been prepared to allow distributions while you are employed.

Your profit sharing provision allows distributions after a fixed number of years (after contributions have been in the plan for at least two years), the completion of 5 years of participation, or upon the occurrence of a bona fide financial hardship

 

              Rollover Withdrawals

 

 EGTRRA  expanded the rollover opportunities between different types of eligible retirement plans (including 401k plans, 403(a) and 403(b) plans, governmental 457(b) plans and IRAs).

 

These increased portability rules have resulted in the opportunity for rollovers from one plan type to another plan type subject to different withdrawal restrictions. For example, a pension plan may not distribute employer contributions prior to retirement, death, disability or other severance from employment, or plan termination.

 

EGTRRA provides that if an eligible retirement plan separately accounts for amounts attributable to rollover contributions to the plan, distributions of the rollover amounts are not subject to the distribution timing rules that apply to distributions of other amounts from the plan. Therefore, the plan may permit distribution of the rollover amounts at any time upon an individual's request.

 

However, a distribution of rollover amounts is subject to any joint and survivor rules, the required minimum distribution rules and the premature distribution penalty tax that apply to the plan receiving the rollover contribution.

 

EGTRRA provisions apply only to rollover contributions, and not the transfer of assets resulting from an employer merger or transfer of assets.

 

              Early Withdrawal Penalty

 

10 Percent Penalty Tax on Early Withdrawals: 

 

In-Service withdrawals made before a participant reaches age 59 1/2, are subject to a 10% additional tax on the withdrawal This tax applies to the amount received and must be included in income.

 

Exceptions to the 10% tax penalty

The 10% tax will not apply if withdrawals before age 59 1/2 are made in any of the following circumstances:

 

  1. Made because of a qualifying disability.
  2. Made as part of periodic payments beginning after terminating service and made at least annually for the life or life expectancy of the participant (payments under this exception must continue for at least 5 years or until the employee reaches age 59, whichever is  longer .)
  3. Made to a beneficiary or to the participants estate on or after the death of the participant.
  4. Made to a participant after separation from service if the separation occurred   after the participant reached age 55.
  5. Made to an alternate payee under a qualified domestic relations order
  6. Made to a participant for medical care up to the amount allowable as a medical expense deduction.
  7. Made because of an IRS levy on the  401k plan or
  8. Made on account of  disasters granted IRS relief

 

Tax Reporting

 Report the tax on early withdrawals with Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

See the Form 5329 instructions for additional tax payment information.

 

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