401K contributions & withdrawals

Submitted by Mike Chamberlain on Sun, 2016-12-11 14:30

I have significant income from self-employment this year and plan to put $45,000 (the limit) into my solo 401K, tax deferred. I have until April to make the 2016 contribution, so my question is – if I make the contribution for 2016 in March of 2017, can I take a distribution from the 401k in 2017?



Submitted by William Tuttle on Sun, 2016-12-11 17:18

Where did you get a limit of $45,000. The total employee + employer annual addition limit is $53,000 for 2016. The employee deferral limit is $18,000, but is shared with any qualified plans (401k, 403b, etc…) you have at other employers. The employer contribution for the self-employed is limited to 20% of (net business profits – 1/2 SE tax). You have until your tax filing deadline including extensions (10/16/17) to make both contributions.

  • In-service withdrawals are subject to IRS regulations and the plan document.
  1. IRS regulations do not permit in-service withdrawal of employee deferrals before 59 1/2.
  2. 401k plan documents may allow in-service withdrawal of employer contribtuions before then.
  3. However, my solo 401k and many others do not allow any in-service withdrawals before 59 1/2.
  4. Hardship withdrawals are allowed in very limited circumstances.

Submitted by Mike Chamberlain on Mon, 2016-12-12 15:14

Thanks Spiritrider for your reply. Sorry, I should have provided more info. (1) I am 60 years old and worked in 2016 solely as a self-employed consultant. My 401K and IRa accounts each currently have over $100,000 balances. (2) I do not anticiapte any income for 2017. While I never say never, I don’t expect to be working again. If I should work again as a consultant then I may wish to contribute to this 401K at some future date.(I don’t know whether that has any impact.) (3) The $45,000 figure (actually $44,785) was arrived at using IRS formulas and verified with several online calculators. It includes both the employee and employer 401K contributions for a self-employed individual ($38,285), plus the contribution to my IRA ($6500).  (4) What constitutes an “in service” withdrawal, as opposed to a retiree withdrawal for someone who is self-employed? So the question is, if I contribute the $45,000 for the 2016 tax year by 4/15/17, is there any problem with my taking a retiree withdrawal of a smaller amount, say $15-$20,000 as retirement income in 2017? (I expect to pay normal income taxes on these amounts, but just don’t want to incur any penalties for these withdrawals.) Also, if I am not mistaken, I have until the date I file my 2016 taxes or April 15, whichever is later. Since I do not intend to ask for an extension (the IRS owes me money), my deadline would be 4/15. Isn’t that correct?

Submitted by David Mertz on Mon, 2016-12-12 16:53

  • Your 401(k) plan agreement will define a distributable event.  One would expect that reaching age 59½ is one such event for a solo 401(k), allowing you to now take distributions from your 401(k) whenever you wish.
  • Note that your traditional IRA contribution cannot be made directly for the 401(k) account.  It could only end up in the 401(k) by first contributing it to a traditional IRA and then rolling it over to the 401(k) if your 401(k) plan accepts such rollovers.  I’m not sure what the benefit to rolling the IRA over to the 401(k) would be.
  • Unless the 401(k) plan agreement includes such restrictions (and I don’t know why it would), there isn’t any restriction on making contributions and taking distributions in the same tax year.  A reason that one might want to do that is to roll a portion of the 401(k) over to an IRA to keep the 401(k) balance under the $250,000 amount that triggers the requirement to file Form 5500-EZ.  However, if you would otherwise be eligible for a Retirement Savings Contributions Credit, the distributions that are not rolled over will reduce the amount on which the credit is based.
  • Making deductible contributions for 2016 and then taking a distribution in 2017 is a reasonable way to transfer from 2016 to 2017 the income tax liability on the amount of the distribution.  In your case, it appears that this will allow you to average out your income a bit.

Submitted by Mike Chamberlain on Mon, 2016-12-12 19:00

Thanks for the reply. That is indeed the reason. Moving money from the higher marginal rate in 2016 to a lower marginal rate in 2017. As long as it is allowed then there is no reason to let it sit in a checking account [~0% interest] when I can get 10% back in just the tax rate difference (state & federal).

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