Solo 401(k)s can allow pre-tax contributions (Traditional) or post-tax contributions (Roth, but only from the employee), with some plan documents allowing for both types into the same account. The distribution parameters surrounding these contributions will match those of their self-directed IRA counterparts.
At age 70½, Required Minimum Distributions (RMDs) begin. The account holder must begin taking an annual distribution by April 1st of the year after he or she reaches 70½ years of age. The SECURE Act made significant changes to RMD requirements for anyone turning 70½ after 12/31/2019. If you turn 70½ in 2020 or later, you won’t need to start taking RMDs until after attaining age 72. Consult with your accountant or tax professional for more information about RMD calculation or exemptions for early distribution penalties.
If you make pre-tax contributions to your Solo 401(k), your distribution responsibilities will mirror those of a Traditional IRA:
You may distribute cash or assets from your Solo 401(k) at any time, though a 10% early distribution penalty will apply. This penalty will be assessed on top of any applicable taxes.
Upon reaching age 59½, the 10% early distribution penalty will no longer apply. Withdrawals will be taxed as regular income and need only occur at your election.
You must begin taking required minimum distributions (RMDs) every year. RMDs are calculated in accordance with your age and your account value.
By making post-tax contributions, you may yield the tax-free distribution benefits of a Roth IRA and never have to worry about RMDs. However, you must follow IRS guidelines for qualified Roth withdrawals per the example scenario below:
You open a new self-directed Solo 401(k) and make a $5,000 Roth contribution. You choose your alternative IRA investments and earn $1,000 in your first year.
You elect to withdraw your $5,000 contribution. Because you already paid taxes in the year you made the deposit, you will not incur duplicate taxes or penalties even though you're not 59½.
You are now older than 59½ and it's been five years since your first contribution. You may therefore distribute the $1,000 your 401(k) earned without paying a penny in taxes!
Solo 401(k)s distinguish themselves from other tax-advantaged savings vehicles by providing two unique circumstances:
You may hit some bumps in the road if you attempt to roll 401(k) funds into another qualified account while still employed under the plan. Such transactions are known as in-service distributions. Per the IRS, only employer contributions may be rolled from a 401(k) if the account holder is under the age of 59½ and the 401(k) is still active. You may roll employee contributions upon reaching age 59½. Both in-service distribution scenarios are predicated on the cooperation of your employer and the plan administrator; the IRS may allow these activities, but that doesn't mean your plan document will.
Loans from a 401(k)
You may not borrow money from your self-directed IRA, but no such prohibition exists for Solo 401(k) holders. If you need cash but don't want to trigger a taxable distribution, you may borrow the lessor of 50% of your account balance or $50,000.
As with any loan, you must repay the balance with interest in a given timeframe. You must make monthly payments at a reasonable interest rate and fully repay the debt within five years. The repayment deadline extends to 30 years if the 401(k) loan is used to purchase your first home.
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