Code section 72(t) generally provides for a 10% additional tax on a distribution from a qualified retirement plan including a solo 401k plan prior to age 59-1/2, unless the distribution falls under one of the various exceptions, which vary (e.g., death, disability, age 59 1/2, separation from service, IRS levy, etc.). The Setting Every Community Up for Retirement Enhancement (SECURE) Act adds a new 10% penalty exception to solo 401k distributions for birth or adoption, but the solo 401k distribution is still subject to federal tax, and depending on your state of residence, state taxes.
Up to $5,000 per solo 401k participant for qualified birth or adoption distributions; thus, each parent can distribute up to $5,000 from his or her own portion of the solo 401k for the birth or adoption.
The birth or adoption solo 401k distribution amount can be repaid at any future time (re-contributed back to any retirement account) including a solo 401k plan.
The 20% up-front federal tax generally applied to distributions from a qualified plan including a solo 401k plan is not mandatory for distributions made due to a qualified birth or adoption exception.
Reporting Qualified Birth or Adoption Exception Distributions
Solo 401k distributions for qualified birth or adoption expenses are reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If the solo 401k participant is under age 59½, the distribution codes to be entered in Box 7 are as follows.
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Code 1, Early distribution, no known exception, if taken from a pretax solo 401k plan
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Codes 1 and B, Designated Roth account distribution, if taken from designated Roth Solo 401k plan
The solo 401k participant claims the exception to the 10 percent early distribution penalty tax by completing IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, when she files his federal income tax return.
If the solo 401k participant is age 59½ or older, the distribution codes to be used are as follows.
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Code 7, Normal distribution, if taken from a pretax solo 401k plan
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Codes 7 and B if taken from designated Roth Solo 401k plan
