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Can I take a Solo 401k Loan to satisfy my Required Minimum Distribution (RMD)?
QUESTION:
I have a solo 401k that I have been contributing to for several years. As I am now age 73, I am required to take minimum distributions from my retirement accounts every year.
My Solo 401k Financial is currently processing Solo 401k loan paperwork for me to take out a $15,000 loan from the account. Can this loan satisfy my required minimum distribution (RMD) for the year?
RESPONSE:
In short: No.
A Solo 401k loan does not qualify as an RMD distribution. An RMD is a mandatory withdrawal that retirement account owners must make every year starting at age 73. The amount is calculated based on your account balance and life expectancy factors.
Even though a solo 401k allows you to borrow up to 50% of your vested balance (up to $50,000), this loan is not considered a distribution. You are simply borrowing your own money and paying it back later.
So while the loan provides access to funds from your account, it does not remove funds from your Solo 401k on a permanent basis like an RMD does. For solo 401k owners/participants starting at age 73, the RMD amount must be withdrawn notwithstanding that one also takes a Solo 401k participant loan.
Learn More: Solo 401k Loans and RMDs
To understand why a 401k loan doesn’t satisfy an RMD, it helps to learn the basics on each of these transactions:
Solo 401k Loans
- Allowed up to 50% of the vested balance not to exceed $50,000
- Must be paid back with interest in equal monthly or quarterly payments of principal and interest over a 5-year term
- Amounts borrowed aren’t taxed or penalized as long as paid back according to the loan payment schedule
Required Minimum Distributions
- Mandatory annual withdrawals starting at age 73
- Calculated based on retirement account balance and life expectancy
- Failure to fully withdraw the RMD amount results in 50% penalty
