Independent contractor 401k for part-time of full-time employee

BACKGROUND: I have a lump sum payment available to me that I have to make a decision on or before Oct 24th of this year about what to do with it.  The pension is from Time Warner Cable via Fidelity.

I do independent contracting work and am, at this point, a sole proprietor.  I do not have a 401K at this time.

I have a couple of questions.

QUESTION 1.  Will TWC/Fidelity likely withhold 20% if the rollover is into a Solo 401K?

ANSWER: First the solo 401k is the retirement plan of choice for independent contractors because of the following:

Former employer plans may be transferred to the independent contractor 401k (also known as a solo 401k), resulting in non-withholding of the 20% mandatory tax that applies to distributions made from a former employer plan. The reason the 20% federal tax does not apply is because the former employer proceeds are made payable in the name of the new independent contractor 401k (solo 401k); therefore, it is vital that the check is not made payable in your name (the participant) because doing so will result in a taxable distribution. Click here to learn more about the 401k to 401k transfer rules.

Second, the  independent contractor 401k (solo 401k) may be invested in alternative investments such as real estate, private company shares, precious metals, notes, tax liens, annuities, commodities, options and equities (stocks and mutual funds).

Third, the independent contractor 401k (solo 401k) allows for participant loans (solo 401k loan). The solo 401k owner may borrow up to 50% of his or her solo 401k balance not to exceed $50,000. Click here to learn about the independent contractor 401k (solo 401k) loan rules.

Fourth, the independent contractor 401k (solo 401k) allows for higher contributions than other retirement plans for the self-employed (e.g., SEP IRA and SIMPLE IRA). The reason why higher contributions may be made to a solo 401k over the SEP IRA and SIMPLE IRA is that the solo 401k is made up of two contributions types: salary deferral and profit sharing contributions. Click here to learn about the solo 401k contribution limits.

QUESTION 2.  If my legal entity of my company were to change, such as becoming a corp. or LLC, would I still be able to use the same Solo401K?  or would I need to start another one?

ANSWER: Because a solo 401k may be adopted by any self-employed entity type, yes the same solo 401k plan can be updated to reflect the new entity type, whether a C-Corp, S-Corp, LLC or Partnership, for example. We would not charge for this plan document update.

I am planning to move in this direction pretty fast, so your speedy reply is appreciated.

Brenda in Arizona

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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