Planning and Distribution Strategy for my Solo 401k

Doing some longer term planning trying to figure out a distribution strategy for my Solo K.   Presently it’s worth about $600K, $500K in rental real estate and $100K in cash.

My wife is 55 and I’m 54.  We intend to work at least the next year.   The business associated with the 401K is doing better than I expected, which only means I’m working more than I wanted…

A couple of questions:

  • Am I correct in assuming there is no way to do a 72t early distribution since that would require us to quit, and end the justification for the Solo K?

ANSWER:

Good question. 72t periodic distributions are not as favorable to Solo 401k plans as they are to IRAs. I personally think that this is the only instance where the solo 401k is not as advantageous as an IRA. To learn more about the 72t Substantially Equal Periodic Payment Rules, click here.

  • We do expect to have at least a year or two with little to taxable income before retirement age, a perfect time to consider this, if possible.

2) Now fast forward to year 2020 when we will both be able to take normal distributions.  Can the 401K outlive the business?   If not, is the only solution to liquidate the property and rollover to an IRA to avoid a huge tax hit?

ANSWER:

I’m not aware of any language in the code that says a solo 401k must be terminated once the self-employed business sponsoring the plan closes its doors. On the other hand, pursuant to IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), contributions to a solo 401k may only be made if the individual generates self-employment income from the business sponsoring the solo 401k. As such, as long as you cease making contributions to the solo 401k once the self-employed business or self-employment ceases, one can continue to with the solo 401k.

Outside of the 401K we have another $250K of rental property.   What we want to figure out eventually is a way to strip off the rental income to retire early without selling any of the property.   But the 401K has more than half of the income stream.

3) I figure the worst case scenario is we have to wait to 59 1/2 and take distributions based on cash flow, keep the business until we are ready to liquidate (or distribute) the property.

Could not find many “FAQs” on the distribution side of the Solo K.

ANSWER:

Please click here to read my blog post on taking distributions from a solo 401k.

 

 

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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