Should the Former Employer 401k Plan Administrator withhold 20% for federal income tax from all retirement plan distributions?
No. The former employer 401k administrator should only withhold 20% for federal income tax from eligible rollover distributions transferred to a Solo 401k. A 401k plan administrator doesn't have to apply withholding if expected distributions to an an individual are less than $200 for the year. The 20% withholding generally only applies to any previously untaxed amount of the eligible rollover distribution (not to any already taxed amount - cost). However, no withholding is required if the 401k plan directly rolls over (in a trustee-to-trustee transfer) the amount to another qualified retirement plan such as a self-Directed Solo 401k.
A partnership makes annual contributions to a partner's Self-Directed Solo 401k retirement plan based on his or her net earned income.
Net earned income
For a partner net earned income is calculated in the same way as for most other self-employed Self-Directed Solo 401k plan participants by starting with the partner's earned income and then subtracting:
IRS Publication 560 has tables and worksheets to calculate the deduction for contributions to a qualified plan for a partner.
Partner's earned income
A partner's earned income is the income he or she receives for his or her services to materially help produce that income (see Code 1402 and 401(c)(2).) A partner must separately calculate her or his earned income for each trade or business.
Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner's income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners). As a result, contributions may not be made to Solo 401k if net income is not generated.
Reporting a partner's earned income
Each partner's earned income or loss is listed on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. The partnership must give a Schedule K-1 to each partner by the filing due date (including extensions) of the partnership's Form 1065, U.S. Return of Partnership Income (instructions).
Publication 541, Partnerships
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
We live in New York and are looking at a vacation condo Located in Los Angeles California. Is there a problem if we purchase the condo from the Solo 401K in a few years (I know we can take distributions) when we have sold our current home if we use the then current appraised value?
Good question. Unfortunately the purchase of the LA, CA real estate owned by your Solo 401k by you would be a blatant prohibited transaction. Specifically, the following: "Sale, exchange, or leasing of property between a plan and a disqualified person." Put differently, The rules prohibit your Solo 401k from holding property in which you or disqualified persons currently occupy or plan to occupy. In other words, the property must be for investment purposes only. Such transaction would be deemed prohibited transaction, with the negative consequences to your Solo 401k resulting in taxes and penalties on the entire balance of the Solo 401k not just the real estate that you would have purchased from it.
Mark Nolan has been active in the 401k and IRA industry for over 18 years. Working as a 401k administrator at Nationwide Insurance Company; then working as a Compliance Officer and Manager at self-directed IRA/401k custodian companies such as Trust Administration Services Corporation (now owned by Equity Trust Company), to IRA Services Trust company. Mark is currently the Compliance Manager at MySolo401k.Net.