Author Topic: A novel approach to free access of tIRA/401k money at age 54-55 instead of 59.5  (Read 7260 times)

TomTX

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I've been doing some pondering (okay, realistically it never stops...) and came up with what I think is a novel approach to dropping the Age 59.5 requirement down to Age 54-55.

As most here should know, if you retire from a job in the year you turn 55 or later, you can then freely access your 401k money. If you retire earlier, or just have IRA money you need to wait until Age 59.5 for the 401k/IRA or use more esoteric/involved/restrictive methods like Roth Pipeline or 72t distributions.

Consider this approach:

1) Start a sole proprietorship. Doesn't matter what.

2) Open a Solo 401k for the business which will allow incoming rollovers

3) Roll over existing tIRA and 401k money.

4) Retire from your small business January 1 of the year you turn 55. So, if you were born on Christmas you will be barely 54.
 
Presto! Your Age 59.5 unlock becomes Age 54.x

So, I haven't vetted this approach - where am I wrong? How do we refine this? Is this already blocked or restricted by IRS rulings?

jim555

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Sounds like a good idea.  Hopefully it is doable.

DaveR

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My understanding is that this is doable, but it's like most things where you have to make sure all the paperwork is in order and the 401(k) administrator handles everything just right (getting you the properly coded 1099-R. Fun IRS reading: https://www.irs.gov/taxtopics/tc558.html

kudy

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I didn't know that was an exception. Seems like a pretty narrow and odd rule, does anyone know *why* that exception exists?

TomTX

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I didn't know that was an exception. Seems like a pretty narrow and odd rule, does anyone know *why* that exception exists?

Retirement accounts are a huge, weird, repeatedly edited slapdash affair.

Alternately "Because Congress wrote it that way"

If you want to look at the law in question:

https://www.law.cornell.edu/uscode/text/26/72#t
« Last Edit: December 05, 2015, 02:44:23 PM by TomTX »

seattlecyclone

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Seems like an interesting approach. You would need to find a solo 401(k) custodian that actually allows incoming rollovers, and you would probably need to perform some legitimate profit-earning business activities at least during the year while you're 54 so that you have a legitimate basis for arguing that your proprietorship isn't only a sham to get you earlier penalty-free access to your retirement money.

I'm not sure how broadly useful this strategy would be though. If you're retiring from your day job after 55, just use that 401(k). If you're retiring from your day job before 55, you will likely be using a Roth ladder or something else to avoid paying early withdrawal penalties, which you can just continue until you hit age 59˝. Maybe it would be good if you retire with enough existing Roth principal and money in taxable accounts to make it to 55 but not 59˝.

TomTX

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Seems like an interesting approach. You would need to find a solo 401(k) custodian that actually allows incoming rollovers, and you would probably need to perform some legitimate profit-earning business activities at least during the year while you're 54 so that you have a legitimate basis for arguing that your proprietorship isn't only a sham to get you earlier penalty-free access to your retirement money.

I'm not sure how broadly useful this strategy would be though. If you're retiring from your day job after 55, just use that 401(k). If you're retiring from your day job before 55, you will likely be using a Roth ladder or something else to avoid paying early withdrawal penalties, which you can just continue until you hit age 59˝. Maybe it would be good if you retire with enough existing Roth principal and money in taxable accounts to make it to 55 but not 59˝.

Well, my own planned retirement date is 19 months before I would be able to use the Age 55 rule.  There are people who could use this ;)

I actually thought of a further extension of it: Take out a 401k loan the year before you could withdraw with the Age 55 rule. Set up a 5 year payback, so take out 20% more than you need. Use the 20% to make your payments in the meantime.

Yes, the loan comes due when you retire, but it can just be taken as a distribution.

The problem of finding a provider who offers a full-featured solo 401k remains.

sol

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I think this idea is worth further analysis.  Especially if you can roll your existing 401k funds into a Solo 401k when you leave your regular job.  Has anyone here actually dealt with a Solo 401k before?

My understanding is that Solo 401k plans let you make contributions as both the employer and the employee, so there's probably some benefit to it in addition to the rollover.

I'm assuming the contribution limits on the Solo 401k are somehow restricted by your business's taxable income?

In a perfect world, the sole proprietorship you set up could be the holding company for your rental property/properties.  That has always seemed to me like the ideal arrangement, because gross rents would accrue to the business instead of you to you and you could then pay yourself a wage (including FICA taxes) to generate some small amount oftaxable income in retirement, which confers all kinds of tax breaks not available to people who are totally retired and not working.  Or better yet, figure out how to make sole proprietorship issue dividends instead of earned income for the 0% tax rate.
« Last Edit: December 06, 2015, 07:40:25 PM by sol »

sol

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I actually thought of a further extension of it: Take out a 401k loan the year before you could withdraw with the Age 55 rule. Set up a 5 year payback, so take out 20% more than you need. Use the 20% to make your payments in the meantime.

Is this "extension" restricted to Solo 401k plans?  If I'm only paying myself back, and can clear the balance upon age 59.5, why not just take a giant 401k loan from my regular 401k plan?  Especially for an MMM-type who is expecting to stay in the 0% tax bracket, this seems like an easier way to access your funds early.

edit: further review suggests that, at least for my current plan, a loan against the balance comes due at separation as an early withdrawal, which means you pay both taxes and the 10% penalty.  That nixes the idea of taking a "loan" for one year's of expenses in the year before you retire early.
« Last Edit: December 07, 2015, 12:21:16 AM by sol »

DaveR

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Has anyone here actually dealt with a Solo 401k before?

Yes. But I have employees now, so converted to regular 401(k).

My understanding is that Solo 401k plans let you make contributions as both the employer and the employee, so there's probably some benefit to it in addition to the rollover.

Yes. You can contribute $18k like normal. You can also company match (tax deductible expense) and the company can make profit sharing contributions. The total amount is $53k.

I'm assuming the contribution limits on the Solo 401k are somehow restricted by your business's taxable income?

No. You can operate at a loss (but I don't recommend it). Pay yourself a $20,754 salary (15.3% FICA tax on top of the $18k), and company match 100%. That's $38,754 of deductible expenses on $0 income. Though of course, you need to have some cash from somewhere to support the burn. And the IRS won't like routine losses (you can get away with losses 2 out of the first 3 years of business). While you're at it, may as well have the company pay your health care premiums and contribute to your HSA. Maybe provide a company car, disability, life, and some other benefits. There are lots of ways to lose money.

In a perfect world, the sole proprietorship you set up could be the holding company for your rental property/properties.  That has always seemed to me like the ideal arrangement, because gross rents would accrue to the business instead of you to you and you could then pay yourself a wage (including FICA taxes) to generate some small amount oftaxable income in retirement, which confers all kinds of tax breaks not available to people who are totally retired and not working.  Or better yet, figure out how to make sole proprietorship issue dividends instead of earned income for the 0% tax rate.

Sole proprietorships (and partnerships and SCorps) are pass through entities. You cannot retain earnings or magically convert ordinary income into capital gains. In order to issue dividends you'll need a C Corp, which will be subject to double taxation (the corp pays income taxes, then pays out dividends after tax, so the effective rate is higher than pass through).

Structuring real estate where gross rents accrue requires a c corp: double taxation, plus treatment of capital gains (when you sell that piece of property) as ordinary income. Ugh. If you look at the structure of REITs or the typical RE JV, they are pass through entities.

And a legitimate business can absolutely pay a wage to owner-employees. You just need to make sure it's reasonable...the IRS likes to chase after owners who pay low wages to avoid FICA taxes while collecting excess as distributions. Also, if you're collecting a wage, you have not terminated employment with the 401k sponsor, so couldn't the whole distribution @55 doesn't quite work.

teacherwithamustache

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Step 1 get your Series 7
Step 2 rollover your huge 401k
Step 3 Sign up yourself for a 8% investment management commission

Roll your money out to yourself legally

I worked 19 years ago when I was a Stock Broker.  Ofcourse the guy I saw do this is now serving time in Federal Prison so there is that.  It did work at one point.

sunday

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Pay yourself a $20,754 salary (15.3% FICA tax on top of the $18k), and company match 100%. That's $38,754 of deductible expenses on $0 income.

Can you do that? I thought the company match was limited to 25% of the employee's salary.

DaveR

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Pay yourself a $20,754 salary (15.3% FICA tax on top of the $18k), and company match 100%. That's $38,754 of deductible expenses on $0 income.

Can you do that? I thought the company match was limited to 25% of the employee's salary.

I think so, but in reality a company rarely matches without limit. There is also a 401k profit sharing feature, but you don't see that often. There different rules for solo 401k vs safe harbor, etc. A 25% limit applies to profit sharing in solo 401k. I don't know all the different scenarios, but do know that if you get to choose how the 401k is set up for a company, you can sock away a lot...$53k/yr if you work it right

dandarc

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US Code - Section 72 (t) (3) (A) specifically says:

Quote
(A) Certain exceptions not to apply to individual retirement plans
Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.

Which is important because sub-paragraph (A)(v) is the exception to 10% penalty for:

Quote
made to an employee after separation from service after attainment of age 55

So no, you can't do this with a Solo 401K.

https://www.law.cornell.edu/uscode/text/26/72

Vilgan

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Pay yourself a $20,754 salary (15.3% FICA tax on top of the $18k), and company match 100%. That's $38,754 of deductible expenses on $0 income.

Can you do that? I thought the company match was limited to 25% of the employee's salary.

I think so, but in reality a company rarely matches without limit. There is also a 401k profit sharing feature, but you don't see that often. There different rules for solo 401k vs safe harbor, etc. A 25% limit applies to profit sharing in solo 401k. I don't know all the different scenarios, but do know that if you get to choose how the 401k is set up for a company, you can sock away a lot...$53k/yr if you work it right

Yep, you can move 53k per year into tax sheltered in a solo 401k. The 53k limit is also 'per employer' so if you have a day job or quit one then whatever you contributed there does not count towards the 53k limit. You'll still have the 18k (+catchup if appropriate) limit on deferrals though which is per person not per employer. The 53k limit also becomes a 106k limit if you are married and include your spouse.

Since you are limited to 18k in elective deferrals across all accounts, how do you hit 53k?

1) The most common is profit sharing. 25% of your profit can be sent pretax to your solo 401k. Since you won't know your overall profit until you do your taxes, you have until taxes are due (Apr 15) to contribute your profit sharing money to the 401k. However, the account needs to have already been created by Dec 31 of the tax year. This is doable with the generic 'free' solo 401k options at Fidelity and Vanguard.
2) Contribute after tax (not Roth), aka the mega backdoor Roth. You contribute a bunch of money after tax (up to the 53k limit). In your 401k its not a great benefit since earnings are still taxable. However, you can immediately roll it over into your Roth IRA where it can grow tax free henceforth. This is not available in any of the free plans, so you'll need to set up a custom plan that allows this which takes some money.

As for the OP, it seems possible but I'm not familiar with the details.
« Last Edit: December 09, 2015, 09:53:20 AM by Vilgan »

dandarc

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Also for reference, the 2015-16 limits for contribution to a Solo K are:

Taxed as corporation:
18K plus
6K catch-up (if you are over 55) plus
25% of salary

The equalization provisions limit a sole proprietor's match to 20% of schedule C net income less 1/2 self employment tax - so about 18.5% of your net which trends up towards the full 20% as income increases.  Also if you are taxed as a proprietor, at low incomes, other limits can come into play, like you can't defer more than you've made.

DaveR

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US Code - Section 72 (t) (3) (A) specifically says:

Quote
(A) Certain exceptions not to apply to individual retirement plans
Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.

Which is important because sub-paragraph (A)(v) is the exception to 10% penalty for:

Quote
made to an employee after separation from service after attainment of age 55

So no, you can't do this with a Solo 401K.

https://www.law.cornell.edu/uscode/text/26/72

Is a solo 401k an individual retirement plan or a qualified retirement plan? A regular ol' 401k is 'qualified' so is treated differently than a traditional IRA.

dandarc

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US Code - Section 72 (t) (3) (A) specifically says:

Quote
(A) Certain exceptions not to apply to individual retirement plans
Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.

Which is important because sub-paragraph (A)(v) is the exception to 10% penalty for:

Quote
made to an employee after separation from service after attainment of age 55

So no, you can't do this with a Solo 401K.

https://www.law.cornell.edu/uscode/text/26/72
Re-reading, I'm not so sure its a straight no.  Depends on the definition of "Individual Retirement Plan".  Which clearly from other posts, the IRS interprets as an IRA.  A SoloK is not an IRA.  But to me, it is an Individual Retirement Plan.

Then you've got the problem of how you define separation from service for a 100% owner, which is nebulous at best.

dandarc

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US Code - Section 72 (t) (3) (A) specifically says:

Quote
(A) Certain exceptions not to apply to individual retirement plans
Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.

Which is important because sub-paragraph (A)(v) is the exception to 10% penalty for:

Quote
made to an employee after separation from service after attainment of age 55

So no, you can't do this with a Solo 401K.

https://www.law.cornell.edu/uscode/text/26/72

Is a solo 401k an individual retirement plan or a qualified retirement plan? A regular ol' 401k is 'qualified' so is treated differently than a traditional IRA.
Looks like you're right - individual retirement plan = IRA.  Still, how do you define 'separation from service' for an owner?

Vilgan

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Also for reference, the 2015-16 limits for contribution to a Solo K are:

Taxed as corporation:
18K plus
6K catch-up (if you are over 55) plus
25% of salary

The equalization provisions limit a sole proprietor's match to 20% of schedule C net income less 1/2 self employment tax - so about 18.5% of your net which trends up towards the full 20% as income increases.  Also if you are taxed as a proprietor, at low incomes, other limits can come into play, like you can't defer more than you've made.

You left out traditional after-tax, which is a possibility in plans with a custom plan document.

See: http://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

As for the separation at 55, it gets weird for self employed because to 'separate' you essentially need to shut down the business. However, if you shut down the business then for a solo 401k you have to distribute the funds within a year. One approach might be to take a lump some payment and roll the rest over to an IRA. Then a year later, start a business, roll in the funds, and shut down the business again. This sounds like something that could lead to problems in an audit though, especially if you don't have a profit to show that you are actually doing a legit business.

If you really needed access to the 401k at 55, one option might be to accept a job with a decent 401k plan, roll funds into it, and then 'retire' after a short period of time.
« Last Edit: December 09, 2015, 10:04:55 AM by Vilgan »

dandarc

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Also for reference, the 2015-16 limits for contribution to a Solo K are:

Taxed as corporation:
18K plus
6K catch-up (if you are over 55) plus
25% of salary

The equalization provisions limit a sole proprietor's match to 20% of schedule C net income less 1/2 self employment tax - so about 18.5% of your net which trends up towards the full 20% as income increases.  Also if you are taxed as a proprietor, at low incomes, other limits can come into play, like you can't defer more than you've made.

You left out traditional after-tax, which is a possibility in plans with a custom plan document.

See: http://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

As for the separation at 55, it gets weird for self employed because to 'separate' you essentially need to shut down the business. However, if you shut down the business then for a solo 401k you have to distribute the funds within a year. One approach might be to take a lump some payment and roll the rest over to an IRA. Then a year later, start a business, roll in the funds, and shut down the business again. This sounds like something that could lead to problems in an audit though, especially if you don't have a profit to show that you are actually doing a legit business.

If you really needed access to the 401k at 55, one option might be to accept a job with a decent 401k plan, roll funds into it, and then 'retire' after a short period of time.
Finding an actual employer to retire from does sound like the best bet.  Challenge would be to find an employer with a 401K you could do this with.  Or just use the SEPP - only have to plan for 5 years.

Sorry for my confusion upthread.

sunday

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Pay yourself a $20,754 salary (15.3% FICA tax on top of the $18k), and company match 100%. That's $38,754 of deductible expenses on $0 income.

Can you do that? I thought the company match was limited to 25% of the employee's salary.

I think so, but in reality a company rarely matches without limit. There is also a 401k profit sharing feature, but you don't see that often. There different rules for solo 401k vs safe harbor, etc. A 25% limit applies to profit sharing in solo 401k. I don't know all the different scenarios, but do know that if you get to choose how the 401k is set up for a company, you can sock away a lot...$53k/yr if you work it right

http://solo401k.bcmadvisors.com/contribution_limits/corporations.html

This seems to suggest otherwise:

"The annual Solo 401k contribution consists of a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Solo 401k contribution limit. 
...

Profit Sharing Contribution

A profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k.

EXAMPLE 1
A business owner is age 35 and the owner of a subchapter S corporation with $50,000 of W-2 earnings in 2015. In this example, the business owner could contribute $18,000 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $30,500 Total Solo 401k contribution.

EXAMPLE 2
A business owner is age 35 and the owner of a subchapter S corporation with $100,000 of W-2 earnings in 2015. In this example, the business owner could contribute $18,000 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $43,000 Total Solo 401k contribution. "

Vilgan

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Yeah, the profit sharing is absolutely capped at 25% (20% for sole prop). You can't have the company match 100% to avoid paying any taxes.

DaveR

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...This seems to suggest otherwise...

Right. A solo 401k has rules and restrictions that don't apply to a "normal" 401k. I didn't explain that too clearly. You can contribute differently (and potentially more) in a normal 401k, but you have to navigate a myriad of other IRS fun (compliance testing, safe harbor, HCE, etc, etc) related to employees.

So, for a solo 401k, I think it's something on the order of:
- $20,754 salary (15.3% FICA tax on top of the $18k), and profit share 25% (if K-1): $25,942 of expenses
- $20,754 salary (15.3% FICA tax on top of the $18k), and profit share 20% (if Sch C): $24,904 of expenses

Probably the best plan is to just make $200k a year so you can hit the $53k annual max. Just ignore all those other tax details.

DaveR

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Yeah, the profit sharing is absolutely capped at 25% (20% for sole prop). You can't have the company match 100% to avoid paying any taxes.

My understanding of 401k contributions: 1) employee contribution, 2) company match, 3) profit sharing. The annual total limit on all is $53k.

For a solo 401k, you aren't allowed #2. But in a normal 401k you can. There are compliance tests and such, but I haven't seen a limit set by statue (there might be?). But it gets expense for companies to match without limit...

dandarc

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Yeah, the profit sharing is absolutely capped at 25% (20% for sole prop). You can't have the company match 100% to avoid paying any taxes.
In case anyone wonders, this 25% for corps / 20% for sole proprietor thing is not an advantage to being taxed as a corporation.  It simply equalizes the amounts because you compute them different ways.  It is 25% of your salary for corps vs. 20% of your profit for sole proprietor.

Same thing with deducting 1/2 self employment tax - just equalizes the accounting between the two structures.

Polish_Hammer

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I still don't get what is so restrictive or difficult about Rule 72T. Yeah you have to take out fixed withdrawls but only until 59 1/2.  If you are retiring in your 50's anyway it's not that long to be under the fixed withdraw

sunday

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Yeah, the profit sharing is absolutely capped at 25% (20% for sole prop). You can't have the company match 100% to avoid paying any taxes.

My understanding of 401k contributions: 1) employee contribution, 2) company match, 3) profit sharing. The annual total limit on all is $53k.

For a solo 401k, you aren't allowed #2. But in a normal 401k you can. There are compliance tests and such, but I haven't seen a limit set by statue (there might be?). But it gets expense for companies to match without limit...

I see what you're saying now, thanks. So, can a single employee corporation have a regular 401k plan instead of using a solo 401k?

dandarc

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Yeah, the profit sharing is absolutely capped at 25% (20% for sole prop). You can't have the company match 100% to avoid paying any taxes.

My understanding of 401k contributions: 1) employee contribution, 2) company match, 3) profit sharing. The annual total limit on all is $53k.

For a solo 401k, you aren't allowed #2. But in a normal 401k you can. There are compliance tests and such, but I haven't seen a limit set by statue (there might be?). But it gets expense for companies to match without limit...

I see what you're saying now, thanks. So, can a single employee corporation have a regular 401k plan instead of using a solo 401k?
It wouldn't matter.  Section 404 (a) (3) (A) limits the deduction for contributions to a profit sharing plan to 25%:

Quote
(A) Limits on deductible contributions
  (i) In general In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501 (a), in an amount not in excess of the greater of—
    (I) 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under the stock bonus or profit-sharing plan, or
    (II) the amount such employer is required to contribute to such trust under section 401 (k)(11) for such year.

So even if you can put in more than the 25%, it is not deductible to the business, which is would be the point of making larger employer contributions. 

If the plan allows it, you could do after-tax (not Roth) contributions to top up to 53K for a mega-backdoor Roth.  But these are not the thing being limited to 25% of compensation.

DaveR

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I see what you're saying now, thanks. So, can a single employee corporation have a regular 401k plan instead of using a solo 401k?

Sure, you can set up a regular 401k instead of a solo. But, regulars have more compliance requirements, so administrative costs are considerably higher. For one person, about 10x ($200/yr or less versus $2000/yr or more). The tax savings on the company match piece probably don't offset the added costs.

Section 404 (a) (3) (A) limits the deduction for contributions to a profit sharing plan to 25%:

Thanks for the citation dandarc, good to know. I did a little reading and saw that the 25% is for the total of all employees, so depending on formula used an individual employee could receive a profit share greater than 25% of their compensation.

I would think in reality, 25% max gives plenty of wiggle room. If you had an "optimal" salary of ~$37k, once you take out payroll taxes, $18k 401k, $5500 IRA, std deduction, pers exemp, you get to ~$0 taxable income. If that salary is coming from a company with a 401k plan offering 100% match on the first 25% of salary and 25% profit sharing, then the company will need ~$60k in revenue to cover all the benefits. In that case: $60k income, no income taxes, $42k in 401k+IRA, ~$12k in your pocket.

That's a pretty solid savings rate. Though $12k/yr might be a little too tight for my tastes. I'll aim a little higher for a $68k salary off $110k in revenue, $57k in 401k+IRA, and $29k in my pocket net of income tax.

TomTX

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I actually thought of a further extension of it: Take out a 401k loan the year before you could withdraw with the Age 55 rule. Set up a 5 year payback, so take out 20% more than you need. Use the 20% to make your payments in the meantime.

Is this "extension" restricted to Solo 401k plans?  If I'm only paying myself back, and can clear the balance upon age 59.5, why not just take a giant 401k loan from my regular 401k plan?  Especially for an MMM-type who is expecting to stay in the 0% tax bracket, this seems like an easier way to access your funds early.

edit: further review suggests that, at least for my current plan, a loan against the balance comes due at separation as an early withdrawal, which means you pay both taxes and the 10% penalty.  That nixes the idea of taking a "loan" for one year's of expenses in the year before you retire early.

If you look at it right it works, but there are criteria:

1) Max payback time of a 401k loan is 5 years.

2) You need to separate from service in the year you turn 55.

Thus, no early withdrawal penalties. However, the loan does come due on separation and if you don't pay it back it counts as income in that year.

dandarc

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I actually thought of a further extension of it: Take out a 401k loan the year before you could withdraw with the Age 55 rule. Set up a 5 year payback, so take out 20% more than you need. Use the 20% to make your payments in the meantime.

Is this "extension" restricted to Solo 401k plans?  If I'm only paying myself back, and can clear the balance upon age 59.5, why not just take a giant 401k loan from my regular 401k plan?  Especially for an MMM-type who is expecting to stay in the 0% tax bracket, this seems like an easier way to access your funds early.

edit: further review suggests that, at least for my current plan, a loan against the balance comes due at separation as an early withdrawal, which means you pay both taxes and the 10% penalty.  That nixes the idea of taking a "loan" for one year's of expenses in the year before you retire early.

If you look at it right it works, but there are criteria:

1) Max payback time of a 401k loan is 5 years.

2) You need to separate from service in the year you turn 55.

Thus, no early withdrawal penalties. However, the loan does come due on separation and if you don't pay it back it counts as income in that year.
Somebody upthread pointed this out, but a Solo 401K is required to distribute 100% within one year of your separation.  Because a 401K has to be sponsored by an active business.  And when the owner and only employee of a business retires, pretty clear that the business is no longer active, so the 401K must terminate and distribute.

Basically, the 55 rule is pretty useless to a one-participant 401K.

TomTX

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I actually thought of a further extension of it: Take out a 401k loan the year before you could withdraw with the Age 55 rule. Set up a 5 year payback, so take out 20% more than you need. Use the 20% to make your payments in the meantime.

Is this "extension" restricted to Solo 401k plans?  If I'm only paying myself back, and can clear the balance upon age 59.5, why not just take a giant 401k loan from my regular 401k plan?  Especially for an MMM-type who is expecting to stay in the 0% tax bracket, this seems like an easier way to access your funds early.

edit: further review suggests that, at least for my current plan, a loan against the balance comes due at separation as an early withdrawal, which means you pay both taxes and the 10% penalty.  That nixes the idea of taking a "loan" for one year's of expenses in the year before you retire early.

If you look at it right it works, but there are criteria:

1) Max payback time of a 401k loan is 5 years.

2) You need to separate from service in the year you turn 55.

Thus, no early withdrawal penalties. However, the loan does come due on separation and if you don't pay it back it counts as income in that year.
Somebody upthread pointed this out, but a Solo 401K is required to distribute 100% within one year of your separation.  Because a 401K has to be sponsored by an active business.  And when the owner and only employee of a business retires, pretty clear that the business is no longer active, so the 401K must terminate and distribute.

Basically, the 55 rule is pretty useless to a one-participant 401K.

It's useful for a partnership or other structure where all participants are owners. Retire from active work, and your partner/spouse/successor owner keeps the business going.

Tjat

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even if this could work, it seems more restrictive than Roth IRA laddering - which you can do at any age.

TomTX

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even if this could work, it seems more restrictive than Roth IRA laddering - which you can do at any age.

Sure you can, and Roth laddering is great with two caveats:

1) You need to plan ahead 5+ years, or make up the difference in cash to live on in the meantime

2) You have a similar or lower tax rate when you start the Roth conversions than when you are retired.

Example for #2: If you are working in California and paying a marginal 35% income tax rate, but plan to move to Florida when you retire at a marginal income tax rate of 10%, the Roth conversion ladder looks a LOT less appealing. Hell, it makes no sense at all because even with the 10% penalty you come out better (marginal tax rate of 20%) - but if you can make this method work, once you hit 54/54, you can stop paying that 10% penalty.

dandarc

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even if this could work, it seems more restrictive than Roth IRA laddering - which you can do at any age.
Example for #2: If you are working in California and paying a marginal 35% income tax rate, but plan to move to Florida when you retire at a marginal income tax rate of 10%, the Roth conversion ladder looks a LOT less appealing. Hell, it makes no sense at all because even with the 10% penalty you come out better (marginal tax rate of 20%) - but if you can make this method work, once you hit 54/54, you can stop paying that 10% penalty.
I don't understand the reasoning here.  The Roth ladder is to save the 10% penalty.  Regardless of your marginal rate on withdrawal, you can save the 10% penalty with the ladder.  The fact that you may come out ahead even without doing it doesn't matter - you'd come out even further ahead by laddering vs just taking distributions and paying the penalty.

My conclusions from this thread:

Leveraging the 55 rule can work, if your Individual 401K is for a business that will out-last your involvement in said business.  Likely a partnership with only Owner-Employees.  Or you retire as an employee from a non-owned business - in which case you're in a regular 401K.  Won't work exactly as originally proposed because in a true one-participant Individual 401K, you have to distribute within 1 year of retiring.

This is also a more or less perfect situation to use SEPP payments, so if you have that big tIRA balance and can't find an employment situation to roll it into a 401K then fairly immediately retire, you're not SOL in regards to avoiding the penalty.  Just giving up a bit of flexibility.