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Solo 401k - in service distributions / rollover

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  • Solo 401k - in service distributions / rollover

    If you open a 401k as a sole proprietor, can you roll money out of it to another qualified plan at any point? Example being, during a low income year rolling a portion over to a roth IRA

  • #2
    Probably not with the standard plans from the usual custodians like Fidelity, Schwab, VG. I believe ETrade does allow in-plan rollovers to their Roth 401k, but I would confirm first. Otherwise you would need a custom plan that allows non-hardship in-service withdrawals.

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    • #3
      As
      GasFIRE
      Physician
      GasFIRE pointed out, E-Trade is the only mainstream low cost one-participant 401k provide that allows in-plan Roth rollovers (IRRs).

      Other than that:
      • the IRS prohibits the in-service Rollover of employee deferrals prior to age 59 1/2. No plan has the ability to allow this.
      • the IRS allows, but does not require 401k plans to allow in-service rollovers of employer contributions prior to age 59 1/2. Plans that allow such rollovers usually implement restrictions based on elapsed time since contribution, length of service, age, etc...

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      • #4
        Is a one participant 401k always "in service"? Or if you have a year without sole proprietorship income could you roll the employee deferrals out then?

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        • #5
          A 401k is maintained from adoption until termination. Periods without income, net profits or contributions are just that. The plan is still maintained.

          If you are thinking about termination in order to rollover. There is a successor plan rule. You can't adopt a new 401k for one year after terminating a previous one. A 401k is intended to be a semi-permanent enity by the IRS.

          @GasFIRE's suggestion and my confirmation of E-TRADE's IRR capability provide a 100% solution to your desire to be able to Roth convert pre-tax one-participant 401k assets.

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          • #6
            That is good to know, thanks. Yes the E-Trade plan will work nicely.

            One idea I had previously for a scenario of early retirement with a desire to draw from retirement accounts was to ladder out money one wished to withdraw prior to age 59.5 by doing Roth conversion 5 years ahead of when you need it, based on the idea that money converted to Roth IRA was eligible for withdrawal without penalty after 5 years. However, I don't think this would work for money converted to Roth 401k which I think would still be subject to the early withdrawal penalty despite the conversion to Roth > 5 years prior, hence the interest in converting or rolling to Roth IRA.

            It sounds like that would still be possible, but not for employee salary deferrals, with a custom plan document. This one for instance allowing rollover once you have participated in the plan for 5 years (https://www.mysolo401k.net/making-so...distributions/).

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            • #7
              You are correct. The minimum distributable nature of IRRs follows that of the source assets. E.g. The IRS prohibits the in-service rollover of IRRs of pre-tax employee deferrals prior to age 59 1/2. The IRS allows, but does not require 401k plans to allow in-service rollovers of IRRs of employer contributions prior to age 59 1/2.

              Last I knew. Acensus one-participant 401k plan documents used by E-Trade, Schwab, TD Ameritrade, Vanguard and some custom providers allow in-service rollovers of employer contributions two years after contribution and immediately after five years of service. You will have to check with each provider to determine if their policies allow this.

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