Last Updated 10/25/2022
QUESTION: If I withdrew money from solo 401k plan, do I have 60 day rollover rule apply for each year? Just wondering if so, how can I make earnest deposit on a short sale property but transaction failed then money has to be returned to 401k but passed 60 days.
Thanks,
Yen in VA
ANSWER: Yes you have 60 days from the date you receive a rollover distribution from a solo 401k (where the check is made payable in your name and 20% was withheld for federal taxes) to redeposit the funds to the same solo 401k; however, because 20% must be withheld at the time of the distribution and submitted to the IRS, you will have to come up with the 20% withheld from other funds like your personal savings account in order to rollover the entire amount originally distributed.
For example, if you distributed $10,000 from the solo 401k, of this amount $2,000 would need to be submitted to the IRS and credited towards taxes paid in the year of the distribution. Next, you could redeposit $8,000 or the full $10,000 to the same solo 401k before the expiration of the 60 day rollover window. However, in order to deposit the full $10,000, you would need to come up with $2,000 of outside funds.
Here is what the IRS has published on this mandatory 20% federal tax from 401k plans including solo 401k plans: https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules
Rollovers from your 401(k) plan
A rollover occurs when you receive a distribution of cash or other assets from one qualified retirement plan and contribute all or part of the distribution within 60 days to another qualified retirement plan or traditional IRA. This transaction is not taxable; however, it is reportable on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. PDF and your federal tax return. You can roll over most distributions except:
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A distribution that is one of a series of payments based on life expectancy or paid over a period of ten years or more,
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A required minimum distribution,
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A corrective distribution,
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A hardship distribution, or
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Dividends on employer securities.
Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your 401(k) plan transfer a distribution directly to another eligible plan or to an IRA. Under this option, no taxes are withheld.
If you are under age 59 ½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions (discussed below).
For further information about rollovers and transfers, refer to Publication 575, Pension and Annuity Income and Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Miscellaneous Comments
One rollover per 12 months does not apply to solo 401k rollover distributions: Unlike IRAs, the one per 12 month rollover rule does not apply to solo 401k rollover distributions; therefore, an unlimited number of rollover distribution may be processed from a solo 401k. Note however that not all solo 401k plans allow for in service distributions, so first check with your solo 401k provider before processing solo 401k rollover distributions.
Solo 401k distribution form: The solo 401k rollover distribution must be formally documented (i.e., a distribution form filled out and signed), and a 1099-R issued to the IRS; this is true even if the funds are re-deposited to the same solo 401k within 60 days.
Paying the 20% Federal Tax: The mandatory 20% federal tax applicable to the solo 401k distribution must be electronically submitted to the IRS by the 15th of the month following the month of the distribution. For example, if Jane makes a qualified solo 401k rollover distribution on April 12, the 20% mandatory federal tax must be paid to Uncle Sam by May 15 and filed electronically. To learn more about paying the mandatory 20% federal tax applicable to a solo 401k rollover distribution, click here.
