Rolling over funds from your employer-sponsored 401k to a Checkbook QRP, Solo 401k or Checkbook IRA is doable in many instances, but you’ll have to overcome some obstacles to do so. With the knowledge provided in this post, you’ll be prepared to get the results you want.
Unlock Your Employer 401(k) to Get Checkbook Control
Why Would I Rollover My Employer 401(k) to a Solo K?
Move your money from an employer plan to a self-directed retirement account to free yourself from the limitations and expenses inherent in many company plans. The available investments may not be aligned with your philosophy and there are many hidden fees that are being deducted from your funds.
Plan features that enable creative strategies, like the Mega Backdoor Roth Account are probably not available in your company plan. If you want all the flexibility allowed by tax law, you should move your retirement funds to a self-directed account, such as a Solo 401k or SDIRA.
Do you want to invest your retirement money in real estate, tax liens, private loans, a friend’s business, precious metals, crypto or any of the other assets allowed by the tax code? Would you’d like to purchase a Caribbean retirement home with your retirement money? You can do all that with checkbook control.
What are in-service distributions? What are in-service withdrawals?
In-service distributions, also referred to as in-service withdrawals, are the terms that are used to describe the topic of this post– getting funds out your employer plan while you’re still in-service.
What do the tax code and tax regulations say about in-service distributions?
Profit-sharing Plan In-service Distributions According to Tax Law
Treas. Reg. §1.401-1(b)(ii) states: “A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment.
The regulations refer specifically to profit-sharing plans and allows plans to distribute assets after any of the following: number of years, attainment of a stated age, or the occurrence of a special event. How many years? Attainment of what age? Good questions! Clearly, age 59-1/2 is not required.
401(k) Plan In-Service Distributions According to Tax Law
- 401(k)(2)(B)(i) of the Internal Revenue Code states that a 401(k) Plan “may not be distributable to participants or other beneficiaries earlier than—(I) severance from employment, death, or disability, (II) an event described in paragraph (10), (III) in the case of a profit-sharing or stock bonus plan, the attainment of age 59½...”
The law makes it clear that 401k distributions generally require attainment of age 59-1/2, unlike profit-sharing plans.
Is the Tax Law Aligned With Your Employer Plan?
For those that have not reached age 59-1/2, employer profit sharing and matching contributions can be distributable, but employee-deferral contributions , QNEC, QMAC, and safe harbor matching contributions require age 59-1/2. For those aged 59-1/2 and older, a 401k plan can allow for in-service distribution of all funds.
Rollover contributions and after-tax contributions can always be distributable prior to age 59-1/2.
Tax law allows employer-plans to be more restrictive than the code – and yours probably is. The challenge is that many of the people involved in implementing your employer-plan don’t know the tax code or what it says in the plan document. What does the plan allow? The only way to get answers to questions is to understand exactly what you’re asking and be persistent.
What Should I Do If I Want An In-Service Distribution to a Solo 401k?
If you’d like to get your money out of your employer plan while still employed consult the Summary Plan Description (“SPD”), or better yet, the actual Plan Document. Armed with the knowledge provided here and in the Plan Docs you may be able to get what you want.
If you’re looking for more cost-effective investing, better investment options, or investing in non-traditional assets with your 401k funds, knowing your options can be very rewarding.