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.
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.