QUESTION:
Can I withdraw funds from my solo 401k and then put them back within 60 days without being hit by the IRS with taxes and penalties?
ANSWER:
Good question and the answer is no because 20% of federal taxes has to be withheld even if rolled over within 60 days.
QUESTION:
I have a lot of questions on this front.
I guess the rules are different for a 401k than an IRA in that respect? Fidelity wrote me a check for the entire amount of my rollover IRA and did not withhold any taxes. They just asked me to affirm some statement that relieved them of that responsibility. I think.
ANSWER:
Correct that the 20% mandatory federal tax does not apply to IRAs but it does to 401k plans.
See following link regarding this rule:
https://www.mysolo401k.net/does-the-20-federal-tax-withholding-apply-to-all-401k-distributions/
QUESTION:
I assume I would get that withholding back when I file my tax return. Would the withholding amount be treated like any other estimated tax payment at that time? I would be allowed to go ahead and make up for the withholding from other funds when I deposit back into an IRA or a qualified plan, right?
ANSWER:
You will get back some of the withholding if you don’t owe any other income tax as the 20% is treated as tax on earned income. Therefore, yes the 20% can be viewed as an estimated tax payment. Yes you can make up the 20% from your personal funds if timely rolled over within 60 days.
QUESTION:
Under what conditions is the 20% withholding required? Is it only for in-service withdrawals? Or are all distributions from 401k plans required to withhold 20%? Is the age of the account holder relevant?
ANSWER:
Generally only death and required minimum distributions (RMDs) are not subject to the mandatory 20% federal tax withholding. See the following link: https://www.mysolo401k.net/does-the-20-federal-tax-withholding-apply-to-all-401k-distributions/
QUESTION:
How about this strategy for fun? A direct rollover from 401k into IRA, then a distribution of the IRA with no withholding, then 60-days later a deposit back into the 401k?
ANSWER:
Yes that would be allowed and the 20% withholding would not apply.
