I’m turning 70 on October 5 so I suspect I will need to start spending some of my 401k money next year to meet minimum distribution requirements. However, about 95% of the funds are invested in real estate. You mentioned once that there is a way to move the real estate out of the solo 401k by, I think you said, allocating part of the real estate back to personal use in lieu of taking cash out of the self-directed solo 401k, then claiming the value of the real estate as income on that year’s tax return. Is that correct? If so, how would I do it (forms, etc.), if not, what options do I have to comply with IRS solo 401k regulations other than just selling the real estate?
Required minimum distributions (RMDs) commence once the solo 401k account holder/participant reaches age 70 ½. Therefore, because you don’t turn 70 ½ until April 5 of next year, the earliest you can begin making RMDs is next April. However, because special rules apply to the very first RMD, you have until April 1 of the year following the year in which you reach age 70 ½ to process your first RMD. But if you do not take your first RMD next year, you will be required to take two RMDs the subsequent year, so it may be best from a tax perspective to take out the first RMD next year instead of delaying it until the following year.
IMPORTANT NOTE: The RMD rules changed with the passage of the SECURE ACT, resulting in the RMD age being age 72 instead of age 70 1/2 effective for distributions made in 2020 and subsequent years. Visit here to learn more.
If the majority of your self-directed solo 401k funds are invested in real estate, the rules allow for the RMDs to be satisfied by taking an in-kind distributions of the solo 401k asset such as a real estate holding. When taking an in-kind distribution of real estate to satisfy the RMD, for example, the applicable RMD amount is deeded from the solo 401k to you personally.
For example, after you get the property appraised, let’s assume the following: i) the property is appraised at $200,000, ii) the property is the only asset of the solo 401k plan, and iii) the RMD amount for that year is 1% or $2,000 of $200,000. Based on this, 1% of the solo 401k owned real estate property would be deeded from the solo 401k into your personal name, resulting in the property now having two owners—the solo 401k at 99% and you personally at 1%. The solo 401k provider would then issue a 1099-R to the IRS for $2,000, so you would pay income taxes and possibly state taxes on $2,000.