Estimating When No Longer Self-Employed - My Solo 401k Financial (2024)

FAQs

What happens to a solo 401k when no longer self-employed? ›

ANSWER: Once you permanently cease self-employment activity, the solo 401k plan will need to be closed and transferred to an IRA or to another employer plan (e.g., your day-time employer's 401k plan).

The assets and funds within the Solo 401(k) would then need to be transferred to an Individual Retirement Account (IRA). This process involves issuing a final Form 1099-R and filing a final Form 5500-EZ with the IRS to formally close the plan.

Generally, the last day of your plan year, or the date you cease operating your business, will be your effective date of termination. The termination effective date should be recorded and maintained with your plan records.

Even if you're over the age of 73, you are not required to take distributions from your 401k IF you're still working at the company. However, this exemption only applies for people who DO NOT own at least 5% of the company. Since you own your business, this exemption does not apply to the solo 401k.

4 options for an old 401(k): Keep it with your old employer's plan, roll over the money into an IRA, roll over into a new employer's plan (including plans for self-employed and small businesses), or cash out.

Like other 401(k) plans, the solo 401(k) will hit you with taxes and penalties if you withdraw the money before retirement age, currently set at 59½. Yes, you can take out a loan or may be able to access a hardship withdrawal, if needed, but those are last resorts.

To convert, you will need to contact your provider and let them know you have employees, and they will amend your plan and begin the process. To manage it well, it's good to at least give a few months heads up to your provider.

In the event of a triggering event, you can roll your self-employed 401(k) assets into another 401(k) (assuming the employer's plan allows rollovers) or an IRA.

To qualify for a solo 401(k), you must produce your income from your own business. And the business must be run by you alone, or you and your spouse.

This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals.

When can you withdraw from Solo 401k without penalty? ›

The taxes you'll have to pay depend on your tax bracket and tax rates the year you make the withdrawal. To make withdrawals from your Roth solo 401k account, you must be at least 59½ years of age AND your account must be at least 5 years old.

You can make a 401(k) withdrawal in a lump sum, but in most cases, if you do and are younger than 59½, you'll pay a 10% early withdrawal penalty in addition to taxes. You can take a 401(k) loan against your balance but will be subject to penalties if you default.

There are two options you can take: Upgrade your solo 401k into a full 401k plan to include your new employee. Terminate your solo 401k and rollover your funds and assets to an IRA.

Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

For investors who plan to use their RMDs as a source of retirement income, a monthly payment may be a good choice. Keep in mind that while you'll pay the same amount of income tax no matter when you receive the money, delaying your RMD until year-end gives your money more time to grow tax-deferred.

Quick facts and who qualifies for a solo 401(k)

No age or income restrictions, but must be a business owner with no employees.

Traditional Individual 401(k)

Withdrawals before age 59½ may be subject to a 10% penalty. Distributions are subject to a mandatory 20% federal tax withholding, except for Required Minimum Distributions (RMDs), hardship withdrawals, certain qualified exceptions, and direct rollovers.