Making Solo 401k Distributions

A Self directed Solo 401k from My Solo 401k Financial allows for distributions. However, different distribution rules apply based on contribution types and the Solo 401k participant’s age. All solo 401k plans that a participant’s account may be distributed upon death, disability, or once self-employment ceases.  In order to distribute funds for other reasons, it depends on the type of contribution used to fund the account. Generally, plans funded with employee contributions including Roth contributions are less accessible under the law than plans funded with employer/profit sharing contributions.

Types of Solo 401k Contributions and Distribution Rules

  •      After-Tax Contributions and Rollover Contributions. The solo 401k plan participant may withdraw at any time (after completing a distribution form), all or any portion of her account balance attributable to “rollover contributions” and/or “after-tax contributions.”
  •    Employer Contributions: Employer contributions are subject to more stringent distribution rules and may be distributed upon the solo 401k participant’s severance from employment, death, or disability. In addition, employer contributions may be withdrawn upon the occurrence of any of the following events:

1) The occurrence of a Hardship,

2) The attainment of age 59 ½

3) The employer contributions being withdrawn have been accumulated in the solo 401k plan for at least 2 years; or

4) The participant has participated in the solo 401k plan for at least 5 years.

  •   Salary Deferrals (employee contributions): Any employee contribution (including any earnings on such amounts) may not be distributed prior to the solo 401k participant’s severance from employment, death, or disability. However, the solo 401k plan permits an in-service distribution of such amounts upon attainment of age 59 ½ or upon a Hardship.

How to Report Self-Directed Solo 401k Distributions & Submitting the Mandatory 20% Federal Tax

The Solo 401k plan distribution will need to be reported several ways and on different dates, and taxes paid by the 15th of the month following the date of the Solo 401k distribution.

By January 31, 2021: You will need to file Form 945 Annual Return of Withheld Federal Income Tax. You can obtain form by clicking on:  http://www.irs.gov/pub/irs-pdf/f945.pdf

Where to file Form 945: Filing depends on your state of legal residence not on the state where you open Solo 401k. Therefore, if your state of legal residence is California, Texas or California, for example, you must mail Form 945 to:

Department of the Treasury

Internal Revenue Service

Ogden, UT

84201-0042

On the other hand, if your state of legal residence is Florida, Massachusetts or New York, for example, you must mail Form 945 to:

Department of the Treasury

Internal Revenue Service

Cincinnati, OH

45999-0042

To find the filing location for your state of legal residence, refer to “Where To File” section of the Form 945 instructions.

For instructions on how to fill out Form 945, CLICK HERE.

By your tax return due date: Report Solo 401k distribution on your tax return

By February 28: File form 1099-R with the IRS, filed by MySolo401k.net and copy sent to you for filing with your personal tax return. For non clients of MySolo401k.net, you should check with your Solo 401k provider regarding the furnishing of form 1099-R to the IRS.

Paying the mandatory 20% federal tax amount on Solo 401k distribution:

  • Must be paid by the 15th of the month following the date of the Solo 401k distribution
  • Must pay tax electronically
  • Electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS).
  • If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf.
  • EFTPS is a free service provided by the Department of Treasury. To get more information or to enroll in EFTPS, call 1-800-555-4477.
  • You can also visit the EFTPS website at www.eftps.gov. Additional information about EFTPS is also available in Publication 966.
  • CLICK HERE  for useful steps in enrolling with EFTPS in order to pay the 20% mandatory federal tax.

Deposit record.   For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. The number can be used as a receipt or to trace the payment.

Depositing on time.   For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p.m. Eastern time the day before the date the deposit is due. If you use a third party to make a deposit on your behalf, they may have different cutoff times.

10% Penalty QUESTION:

I have a question as to when I can pull funds out of my solo 401k account without being penalized for it.  I know I will have to pay taxes, but I am wondering about the penalties.  I am 65 right now and will be 66 in March 2018.

ANSWER:

You are talking about the 10% (ten) early distribution penalty, which only applies if you are under age 59 1/2 at time of solo 401k distribution.

Distributions from Spouse Account QUESTION:

My wife and I are both Trustees on the solo 401k and we both hold funds in the plan. Can I take distributions from her account at age 59 1/2 as she is much younger than me without the consequence of early withdrawal penalties?

ANSWER:

Good question; however, no the rules do not allow for one spouse to piggyback of the other spouse’s age when making solo 401k distributions.

Transfer Money to IRA QUESTION:

Can I transfer monies from my Solo 401K to my IRA without withholding taxes being paid?  I transferred money from my IRA to my Solo 401K without any withholding.

ANSWER:

Generally, unless you are age 59 1/2 or over, only amounts that were transferred to this solo 401k from other IRAs or former employer plans can be transferred to an IRA which would be re portable on Form 1099-R but not taxable. These are IRS statutory rules.

Multiple Distributions QUESTION:

Suppose I distribute $10,00 from my Solo 401k account and pay the $2,000 in tax and then Rollover the $10,000 back to my Solo 401k account within 60 days. If I later withdraw another $10,000 do I have to pay another $2,000 (20%) tax?

ANSWER:

Yes as the mandatory 20% federal tax withholding applies to each  solo 401k distribution amount.

60-Day Distributions QUESTION:

With my solo 401(k), please assume I did a withdrawal for a rollover on 3 DEC 2018, and then made the completing deposit on 28 JAN 2019 (56 days later) back into the same account.  Given the 1-year waiting period before doing another rollover, on what date could I subsequently do another withdrawal to START another rollover?

ANSWER:

You can do as many 60 day rollovers from a 401k plan as the rules are not the same as for IRAs. However, you still have to pay the 20% mandatory tax upfront regardless if the funds are rolled back within 60 days. This is probably why the IRS does not apply to same IRA rollover rules to 401k plans since IRAs are not subject to the mandatory 20% withholding requirement.

Federal Income Tax Bracket QUESTION:

I was under the (perhaps false) impression that the amount of tax I would pay upon taking a distribution depended on my current federal income tax bracket.  In other words, if I am still working for another company and my salary puts me in the 30% federal tax bracket, I would need to pay 30% of the distribution as federal tax.

However, your article describes a mandatory 20% federal tax on the distribution.

Which is it?

ANSWER:

The 20% is a federal tax withholding amount is based on the solo 401k distribution amount that gets submitted to the Department of the Treasury by the 15th of the  month following the date of the solo 401k distribution.
The 20% gets credited towards your income taxes due by April 15 of 2019, for example, if you take a distribution in 2018.
As a result, you still may owe more taxes on the 401k distribution amount or you may get some back in a form of a tax refund from the IRS.
Lastly, while 20% is the mandatory withholding amount, if you wish you can certainly withhold more than 20% from the solo 401k distribution and submit it to the government by the 15th of the month as described above.

Distributions for Seniors Form 1040SR QUESTION:

Can solo 401k distributions taken by seniors be reported on Form 1040SR?

ANSWER:

Yes beginning in 2019. In the past, individuals had to report certain types of income (including IRA and employer solo 401k plan distributions) on the more complex Form 1040, U.S. Income Tax Return, or Form 1040A, U.S. Income Tax Return. Individuals age 65 and older may now use the simpler Form 1040SR to report income such as capital gains and losses, interest or dividends, distributions from  solo 401k retirement plans, and Social Security benefits.

Hardship Distribution QUESTION:

I find myself in need of a hardship withdrawal. What are the parameters under which I am able to do this – Specifically relating to home mortgage.

ANSWER:

The purpose of exercising the hardship distribution option under a qualified retirement plan such as a solo 401k plan is to be able to gain access to solo 401k funds before you reach age 59 1/2.
Note that our solo 401k plan allows for distributions of any funds that you transferred form IRAs or former employer plans even if you are under age 59 1/2.
Please note that hardship distributions are still subject to taxes (federal, and possibly state taxes depending on your state of residence). Hardship distributions from 401k plans including solo 401k plans are also subject to the 10% early distribution penalty if you are under age 59 1/2 at time of the distribution.
Please let us know if you wish to discs tribute funds that were previously transferred to the solo 401k plan from a former employer 401k or IRA sot that we can send you the distribution form and procedure.

For information on the firs-time home-buyer hardship distribution rules, please see the following:

Information Surrounding Making Distributions for Those Impacted by Coronavirus

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2o2o and has the following impact on solo 401k distributions made on or after January 1, 2020, and before December 31, 2020. IRS released new guidance on June 19, 2020: June 19, 2020 IRS Notice 2020-50

Participants may distribute up to $100,000 from their solo 401k plan without being subject to the 10% early distribution penalty that normally applies if the participant is under age 59 1/2.

To qualify for the distribution relieve, however, the following qualification apply:

  • an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
  • an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.

Participants’  not the solo 401k plan provider will need to retain  records certifying that they meet the CRD requirements.

  • The solo 401k participant may repay the coronavirus related distributions (CRDs ) over three years beginning with the day following the day a CRD is made. Repayments may be made to the solo 401k plan or to an IRA.
  • CRD repayments made within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
  • CRDs will be taxed ratably over a three-year period, unless the participant elects otherwise.
  • Although CRDs may be rolled over, they are not considered “eligible rollover distributions” for certain purposes. Also,  the  20 percent upfront federal tax withholding does not apply to CRDs.  To learn more on how to repay the COVID-19 solo 401k distribution, VISIT HERE.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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