Retirement Access Strategies

NOT LEGAL OR TAX ADVICE. DRAFT — pending professional review. Engage a licensed ERISA attorney and a CPA before implementing any of the below. Circular 230 notice applies.

Executive summary#

When a cohort member changes employers or starts a side business, their old-employer 401(k) becomes accessible in ways it was not while employed. What's accessible depends on which path is taken. The legitimate options, in rough order from lowest to highest complexity and risk:

1. Roll old 401(k) → IRA (Traditional or Roth) — keep tax-deferred status, broad investment menu. Easiest. Does not give early access to cash without penalty.
2. Roll old 401(k) → Solo 401(k) — once self-employment is in place. Higher contribution limits, can include Roth, allows participant loans up to $50K.
3. 401(k) participant loan (after rolling into Solo 401(k)) — IRC § 72(p), up to $50K or 50% of vested balance. Not taxable if rules met.
4. 72(t) SEPP — substantially equal periodic payments avoid the 10% early-withdrawal penalty. Locks the participant in for at least 5 years or until age 59½, whichever is later.
5. Rule of 55 — only if the participant separated from service in or after the year they turned 55. Often inapplicable.
6. ROBS — Rollover as Business Startup — most aggressive. Permitted by IRS but heavily audited. Requires C-corp, qualified plan, fair-market-value stock purchase, ongoing nondiscrimination testing.
7. Outright early distribution — taxable income + 10% penalty. Almost never the right answer.

1. Direct rollover — IRC § 402(c)#

Statute. IRC § 402(c)(1): an eligible rollover distribution from a qualified trust is not includible in gross income for the year of distribution.

Mechanism. Trustee-to-trustee transfer (60-day rollover also permitted but trustee-to-trustee is safer; sidesteps the one-rollover-per-year rule of § 408(d)(3)(B) per Bobrow v. Comm'r, T.C. Memo 2014-21, and IRS Announcement 2014-15).

Roth conversion. Rolling pre-tax → Roth IRA triggers tax now in exchange for tax-free withdrawals later. Roth conversion is not "free money" — it accelerates tax in exchange for tax-free growth thereafter.

Reporting. Form 1099-R from former plan; Form 5498 from receiving custodian. Direct rollover = Box 7 code "G" on 1099-R; not taxable.

2. Solo 401(k) — the core#

Statutes. IRC § 401(a) (qualification), § 401(k) (CODA), § 415(c) (annual additions). Solo 401(k) is a regular 401(k) with no common-law employees other than owner and spouse.

Eligibility. Must have net self-employment income from a legitimate trade or business. The cohort member's LLC must be operating (or at least open for business; reasonable preparatory expenses can support self-employment status, but a plan with $0 SE income for the year produces $0 in employee deferrals).

2026 limits (verified via IRS Notice 2025-67):

• Employee elective deferral: $24,500 (Traditional or Roth) — IRC § 402(g).
• Catch-up age 50+: $8,000 additional.
• SECURE 2.0 super-catch-up age 60–63: $11,250 (replaces $8,000).
• Employer profit-sharing: up to 25% of compensation (sole prop / single-member LLC: ~20% of net SE earnings after ½ SE-tax adjustment).
• Total annual additions (§ 415(c)): $72,000 / $80,000 with catch-up / $83,250 with super-catch-up.
• Compensation cap (§ 401(a)(17)): $360,000.

Rollover capacity. Old 401(k) can roll into the Solo 401(k). The rolled-over balance is not subject to the annual contribution limits — it is a transfer of already-tax-deferred dollars.

Establishment timing. Per SECURE Act § 201, a plan can be adopted as late as the business's tax-filing deadline (with extensions) for the prior year. But elective deferrals only apply to the year the plan is in place; a plan adopted in 2027 for 2026 cannot accept retroactive 2026 employee deferrals (only employer profit-sharing).

Form 5500-EZ. Required once plan assets > $250,000 or in the final year. $250/day late penalty (capped) under § 6058 / § 6652(e); IRS Penalty Relief Program available.

Roth Solo 401(k). Per IRC § 402A, designated Roth contributions are permitted. SECURE 2.0 also permits Roth employer contributions (effective 2023) — a meaningful change. Roth contributions are NOT deductible but grow tax-free and are tax-free on qualified distribution.

3. § 72(p) participant loans#

Cap. Lesser of $50,000 or 50% of vested balance. Special rule: if balance < $20,000, can borrow up to lesser of $10,000 or 100% (some plans).

Repayment. Level amortization, at least quarterly, generally 5 years (longer for primary residence purchase). Interest is paid back to the participant's own account.

Failure consequences. Failure to make payments converts loan to "deemed distribution" — taxable, subject to 10% penalty if under 59½. The participant cannot roll over the deemed-distribution amount (Treas. Reg. § 1.72(p)-1, Q&A 13).

Use case. A Solo 401(k) loan can fund up to $50K of bakery startup capital (or any other purpose). The loan must be a bona fide loan with documented terms, paid back from the cohort member's W-2 or self-employment earnings. Loan proceeds can be used for any purpose (no tracing required) — but the loan is from the plan to the participant personally, not from the plan to the business. Direct plan-to-business transactions hit the prohibited-transaction rules of § 4975 (see ROBS section).

4. 72(t) SEPP#

Statute. IRC § 72(t)(2)(A)(iv).

Three IRS-approved methods (Rev. Rul. 2002-62):

1. Required Minimum Distribution — uses life-expectancy tables. Lowest annual payment.
2. Fixed Amortization — amortizes balance over life expectancy at a "reasonable interest rate."
3. Fixed Annuitization — uses an annuity factor.

Lock-in. Once started, payments must continue for at least 5 years OR until age 59½, whichever is LATER. Modification before that triggers retroactive 10% penalty plus interest on all prior SEPP withdrawals.

SEPP fits when a long-horizon predictable cash need exists. Poor fit for "fund a bakery in year 1 then leave the rest alone."

5. Rule of 55 — IRC § 72(t)(2)(A)(v)#

If a participant separates from service in or after the year they reach age 55, distributions from that specific employer's 401(k) are exempt from the 10% early-withdrawal penalty.

• Applies only to the 401(k) of the employer just left, not to rolled-over IRAs.
• Rolling out of the old 401(k) destroys the Rule of 55 access for the rolled-over funds.
• Special category for public-safety workers: age 50; SECURE 2.0 expanded to private-sector firefighters and corrections officers in some cases.

6. ROBS — most aggressive, heavily regulated#

Mechanics from the IRS Memorandum, Oct. 1, 2008, "Guidelines regarding rollovers as business start-ups":

1. Form a C-corporation (S-corp will not work — § 1361(b)(1)(B)).
2. C-corp adopts a qualified profit-sharing plan with a 401(k) feature.
3. Participant rolls existing 401(k)/IRA balance into the new plan (trustee-to-trustee).
4. The plan purchases newly issued employer stock of the C-corp at fair market value.
5. C-corp now has cash from the stock sale — funds the business.

Why it must be a C-corp. S-corp shareholders must be individuals (or certain trusts), not qualified plan trusts. A qualified plan owning S-corp stock generates 100% UBTI under § 512(e). LLCs taxed as partnerships hit similar problems.

Why this is permitted. The IRS 2008 ROBS Memorandum expressly states ROBS is not per se an abusive tax-avoidance transaction but identifies two recurring failures:

1. BRF nondiscrimination violations (Treas. Reg. § 1.401(a)(4)-4) — when the plan offers stock purchase only to the owner, not to subsequently hired rank-and-file employees.
2. Deficient stock valuation — overstating the value of the C-corp at issuance (or buying stock for less than FMV).

Prohibited-transaction landmines (IRC § 4975).

• 15% initial tax on the amount involved per year.
• 100% tax if not corrected within the taxable period.
• For IRAs, the entire account is treated as distributed on January 1 of the year of the prohibited transaction (§ 408(e)(2)).

Key cases.

• Peek v. Comm'r, 140 T.C. 216 (2013) — personal guarantee of loan to IRA-owned LLC = prohibited transaction; IRA disqualified.
• Ellis v. Comm'r, T.C. Memo 2013-245, aff'd, 787 F.3d 1213 (8th Cir. 2015) — salary from IRA-owned LLC to owner = prohibited transaction.

Feasibility for cohort use cases. Doable but heavy. Annual corporate filings, board meetings, 1120 returns, stock valuation by independent appraiser, Form 5500, plan administration, Watson-reasonable W-2 wage to the owner-officer. Inappropriate when the entrepreneur intends to hire employees and exclude them from the plan; or when the business is service-only and the C-corp double-tax bites hard.

Comparison matrix#

| Option | Capital available | Tax cost now | Penalty risk | Complexity | Best when | |---|---|---|---|---|---| | Rollover → Trad. IRA, leave alone | $0 today | $0 | $0 | Low | Default; preserves all options. | | Rollover → Solo 401(k), no withdrawal | $0 today | $0 | $0 | Low–Med | New tax-deferred contributions from self-employment income. | | Solo 401(k) participant loan | Up to $50K | $0 | Default → deemed distribution + 10% penalty | Med | Modest capital need; earnings to repay. | | 72(t) SEPP | Predictable annual | Ordinary income on each year's payment | $0 if rules followed | Med | Long-horizon need for steady cash. | | Rule of 55 | Variable | Ordinary income | $0 | Low (if applicable) | Participant was 55+ at separation. | | ROBS | Up to full plan balance | $0 at rollover | 15% / 100% § 4975 + plan disqualification if mis-structured | High | Capital-intensive business; willing to operate as C-corp; will not exclude employees. | | Outright early distribution | Up to full balance | Ordinary income on full amount | 10% § 72(t) | Low | Almost never. |

What this memo does NOT cover#

• State income tax treatment of distributions and rollovers. State conformity is partial and date-specific.
• Spousal consent rules for distributions from qualified plans (ERISA § 205, IRC § 417). Plan-document-dependent.
• RMDs at age 73 (post–SECURE 2.0).
• Beneficiary planning under SECURE Act 10-year rule.
• Mega Backdoor Roth strategies — only relevant after Solo 401(k) is operational and self-employment income is sufficient.

NOT LEGAL OR TAX ADVICE. ERISA attorney + CPA review required before any of these strategies are implemented. Circular 230 notice applies.