I’m closing down my self-employed business and then my solo 401k. What are the next steps for this? If I wanted to take a full distribution and not set up an IRA LLC, how would that work and what would be my tax obligations? I have money in the solo 401k account at the bank as well as physical gold assets.
By closing down the self-employed business that is sponsoring the solo 401k trust, the severance from employment requirement is met; therefore, the solo 401k plan can be terminated.
Taxes and 10% Early Distribution Penalty
Because you do not want to transfer the solo 401k assets to an IRA or another retirement plan, the solo 401k distribution will be subject to federal taxes and possibly state taxes if you live in a state that requires payment of state taxes. Also, you will have to pay a 10% early distribution penalty if you are under age 59 ½. This taxable distribution is reported on Form 1099-R by the solo 401k provider.
With respect to processing a distribution of the physical gold assets held inside a solo 401k, the gold is assigned in-kind to you (the solo 401k participant), with the fair-market value determined on the day the in-kind distribution is processed. The value of the Gold and any other cash remaining in the solo 401k bank account is listed on the distribution form.
No Taxes and Penalties if Transferred to an IRA
After understanding the solo 401k distribution ramifications, you may decide to process a direct-rollover of the cash and the gold holdings to an IRA instead which is a non-taxable event. You can transfer most distributions except for:
- A distribution that is one of a series of payments based on life expectancy or paid over a period of ten years or more,
- A required minimum distribution,
- A corrective distribution,
- A hardship distribution, or
- Dividends on employer securities.
What happens if the 401K is invested in real estate and it is converted back into an IRA. Would we have to liquidate or just retitle the property?
The solo 401k owned real estate can be transferred in-kind to a self-directed IRA. This means the real estate is not sold but rather the ownership is transferred to the self-directed IRA, with the fair market value (FMV) of the property included in the non-taxable direct rollover amount reported on Form 1099-R.