Is there a limit to rollover amount from solo 401K to IRA ?

[Suresh-Agrawal]

I am self employed for 15+ years and have contributed to my own company's (LLC) in 401K and will also do for 2017.  I am 68 years old. As my consulting income fluctuates, I am thinking to contribute maximum for 2017 (50K+) and minimize my taxes for 2017.  In 2018 I may have to withdraw money from this account if I don't have income in 2018.  I am told that they will hold 20% tax before 401K distribution.  What if I rollover entire 401K in 2018 to IRA and then withdraw without having to withhold 20% tax which may be much more than I would pay in 2018 for zero income.  Please advise and pardon my ignorance.

[Carl]

If you do a trustee-to-trustee rollover (meaning you never touch the money yourself) then you'll have nothing to report. Otherwise if you do it yourself, the withdrawal will be treated as that - a withdrawal. Then any taxes withheld from the withdrawal would have to be replaced by you to complete the rollover so that you would get the withheld taxes refunded to you at tax filing time.

[dmertz · Accepted solution]

A minimum of 20% withholding is mandatory for a distribution from the 401(k) paid to this account owner because such a distribution is eligible for rollover.  (Section 3405(c)(1)(B))  Only a direct rollover is exempt from mandatory withholding.  (Section 3405(c)(2))  An indirect, 60-day rollover will be subject to mandatory withholding and to complete the rollover of the entire distribution you would have to substitute other funds to replace those withheld for taxes.

Distributions from an IRA are *not* subject to mandatory withholding, but 10% must be withheld unless ones specifies that nothing be withheld or that more than 10% be withheld.  By performing a direct rollover of some or all of the 401(k) to an IRA, then taking a distribution from the IRA and specifying that no taxes be withheld, withholding on a distribution can be avoided.

You decision on how much to roll over from the 401(k) to the IRA will depend on how frequently your 401(k) plan permits you to take distributions (for a solo 401(k), probably unlimited), whether or not the investments available in the 401(k) plan are more desirable than the investments available in an IRA, whether or not your state provides any bankruptcy protection in the solo 401(k) over that of an IRA, and whether or not your state provides any state tax exclusions for distributions from a solo 401(k) but not from an IRA.  You'll likely also want to keep your solo 401(k) balance under the $250,000 threshold where filing Form 5500-EZ becomes required.

[SweetieJean]

Have the 401(k) plan administrator do a direct Trustee to Trustee transfer to the IRA. That way, no taxes are required to be withheld.

[SweetieJean]

But first check to see if the plan even permits a rollover while you are still working.

[Carl]

ALso, If you do it yourself, you have a maximum of 60 days to roll it to another retirement vehicle. Otherwise, you pay taxes on the withdrawal.

[Critter]

They are not required to withhold the 20% although that is the norm.  And if you are over withheld the excess is refundable on your return. 

Rolling the funds to an IRA should be done by trustee to trustee transfer to avoid the withholding but be aware that you may get hit with some fees from the IRA trustee when you make distribution or if you clear the entire account. 

In the end both ways will net you the same in the end ... it is up to you how much effort you want to put forth.