Making solo 401k distributions | Payment of 20% Federal Taxes

Hi, I have the following questions surrounding making solo 401k distributions.

QUESTION: How we can use the rental income from the rental house after the money (profits) is deposited in the Solo 401k Account?. Ex.: We deposit 3 thousand in rental income and we need spend 1500 for personal expenses. How much % of taxes we have to pay on this money?

ANSWER: It is important to understand that the solo 401k distribution rules must be followed, which include first qualifying to make distributions (i.e., meeting on of the distribution triggering events: retirement age or separation from service). Some plans will allow for distribution of funds previously rolled over from other 401k plans or IRAs to the solo 401k plan. If the distribution triggering event is satisfied, each solo 401k distribution must be documented on a distribution form in order to meet the written distribution requirement.  Further, 20% mandatory federal taxes apply on each amount distributed from the solo 401k and submitted electronically to the Department of the Treasury by the 15th of the month following the solo 401k distribution. What is more, a Form 1099-R to report all the distributions made during the year must be filed with the IRS by February 28 of the following year following the date of distribution. In sum, specific IRS rules must be followed when processing solo 401k distributions.

Thank you,

Jane in SouthCarolina

Transfer former employer 401k to solo 401k and process Solo 401k Loan

QUESTION 1: I have confirmed from my existing 401K plan that they can do a direct rollover of my funds to a solo 401k.  I would like to find out if you accept 401K direct rollovers?

ANSWER: Yes the qualified plan rules permit for the transfer of former employer plans such as a 401k to a solo 401k.

QUESTION 2: If number 1 is possible, how long does this process take?

ANSWER: As soon as the solo 401k bank account has been setup, you can obtain the transfer-out form from your former employer which we will assist you in properly filling out to help ensure the former employer 401k funds are properly processed as trustee-to-trustee transfer to the solo 401k plan. Often times the former employer will allow for the transfer of the funds by wire to the new solo 401k bank account. If they require the issuance of check, the check will need to be made payable in the name of the solo 401k plan not your name in order to avoid distribution taxes and early distributions penalties.

QUESTION 3: If number 1 is possible, and subject to number 2, how many days/weeks should lapse before I can make a loan from the solo 401K just opened?

ANSWER: As soon as your solo 401k is funded, you can process a loan immediately as we will prepare the solo 401k loan documents and payment schedule in 24 hours.

Thnx,

Jim in San Antonio, Texas

The solo 401k plan is for the self-employed

BACKGROUND: The solo 401k plan is for those with OWN businesses, the self-employed or self-practitioners.  This I already understand.

I recently lost my job so I want to fully use the solo proprietorship business that I
registered in my county way back.

No, I don't have a history of income with this entity.  But what I want to do is to use
this registered business now in investing in real estate--buying and holding/selling.

This will be my source of livelihood.

I prefer to open a solo 401K since I would be able to make a solo 401k loan from it too which
I can use (without the 20% early withdrawal tax) to buy properties.  This way,I can
also file whatever I profit or earn appropriately as a self-employed person buying
and holding/selling properties.

QUESTION: So unless my application requires a history of self-employment, do you think it
will work for someone who's just going into a solo business and wants to start a solo 401k?

ANSWER: If purchasing and selling real estate is how you generate earned income, you report it as such to the IRS, and have not full-time employees, then on the surface you meet the requirements to set up a solo 401k. Reason being, your personal services (i.e., actively managing the properties) are a material producing factor. In other words, you are actually doing the work and not simply generating passive income, which is different from earned income.

However, it is important to understand that once your stop being self-employed you can no longer continue to participate in the solo 401k and will instead need to transfer it to an IRA (e.g., self-directed IRA) or another employer 401k (e.g., if you go back to the corporate world and the new employer offers a 401k plan, then you can transfer your solo 401k plan to it, but may need to first liquidate the investments held in the solo 401k and subsequently transfer the proceeds). Simply stated, the self-employment requirement for establishing a solo 401k is not just a one-time process, but rather the individual must continue to be self-employed.

Lastly, you will need to ultimately consult with your personal tax professional as to whether or not you will qualify for a solo 401k, as presumably he or she will understand your particular personal tax and business tax situation the best. 

Thank you.

Jake in NJ