A Self-Directed Solo 401k is not an IRA
First, it is important to understand that a solo 401k plan is not an IRA. This is an important factor when distributing to the alternate payee solo 401k funds stemming from a divorce. Reason being, unlike IRAs s where the funds can be disbursed to the alternate payee pursuant to a court ordered divorced decree, in order to disburse solo 401k funds to the alternate payee directly or to her IRA a qualified domestic relations orders (QDRO) is required.
Option 1: Direct Rollover to Traditional IRA and/or Roth IRA
- If the self-directed solo 401k plan holds both Roth and pretax funds, and the alternate payee was awarded funds from both sources, then the alternate payee can elect to directly rollover the awarded funds to her respective traditional IRA and Roth IRA.
- By directly rolling over the awarded funds, the alternate payee is eligible to defer taxation on those funds until she takes distributions from the receiving IRAs.
- To process the non-taxable direct rollover, the alternate payee would fill out the solo 401k distribution form and elect the direct rollover option once the IRA or IRAs have been established.
Option 2: Transfer to a 401k Plan
- Just like the direct rollover option is available for transferring to IRAs, the alternative payee can also direct to process non-taxable transfers of solo 401k funds (both pretax and Roth) stemming from a QDRO to her full-time employer 401k plan, or if she is also self-employed, to her own self-directed solo 401k plan.
- To process the non-taxable transfer, the alternate payee would fill out the solo 401k distribution form and elect the transfer to a 401k plan option.
Option 3: Take as Taxable Distributions
- If the alternate payee chooses to have the QDRO funds distributed to her directly (as opposed to having the funds directly rolled over to IRAs or transferred to a 401k plan), the solo 401k trustee must apply the 20 percent federal income tax withholding rate to the distributions.
- If Roth solo 401k funds are also being awarded pursuant to the QDRO and the alternate payee elects to have the Roth solo 401k funds disbursed to her, those Roth funds will be taxed under the Roth solo 401k distribution prorata rules unless she is over age 59 1/2 and the Roth funds have been in the Roth solo 401k for at least 5 years.
- To process the taxable distribution, the alternate payee would fill out the solo 401k distribution form and elect the distribution option.