Solo 401k providers and solo 401k owners often don’t understand that the same distribution rules that apply to full-time employer plans (i.e., those plans with full-time employees besides the business owner(s)) also apply to solo 401k plans. However, that is simply not correct. Some solo 401k owners will ask the solo 401k provider to assist in reporting a distribution from the solo 401k plan whenever the solo 401k owner wants the money. “It’s my business, my plan, and my savings,” may say the solo 401k owner. Yes it is your money, but you are a participant in the plan; the business (e.g., the sole proprietorship, S-Corp, LLC or LP) is the owner (sponsor) of the solo 401k plan. As a result, in order for the solo 401k plan to receive the tax-favored status, the solo 401k plan is required to meet certain IRS and Department of Labor requirements. A triggering event is required before solo 401k distributions can commence.
Following are some of the common solo 401k distribution triggers:
Funds or Assets Transferred from IRAs or Former Employer Plans to the Solo 401k Plan– The solo 401k participant can distribute any funds that have been transferred to the solo 401k plan from IRAs (e.g., traditional IRAs, SIMPLE IRAs and SEP IRAs) or former employer plans such as a 401k, 403b, 457b or TSP to name a few.
Attainment of Normal Retirement Age – The solo 401k plan documents may specify an age as the “normal retirement age” for purposes of plan operation (generally between age 591⁄2 and 65). If a plan permits, a participant (the solo business owner) who attains normal retirement age may elect to begin receiving distributions from the plan.
Death – upon the death of the solo 401k owner, the beneficiary can start processing distributions form the solo 401k plan. Remember that a plan participant must generally name her spouse as the beneficiary unless the spouse has consented in writing to the naming of another beneficiary.
Disability – A solo 401k plan permits the participant to begin receiving distributions from the plan should she become disabled.
Plan Termination – The solo 401k plan documents will allow a participant to request a distribution from the plan if the plan is closed (i.e., the self-employed business shuts down).
Additional Types of Distributions – A solo 401k allows for in-service distributions of profit sharing and salary deferrals employee contributions provide the following requirements are met:
Employer/Profit Sharing contributions can be distributed from the solo 401k plan once accumulated in the solo 401k plan for at least 2 years; or the participant has participated in the solo 401k plan for at least 5 years.
An alternative way to access solo 401k funds is to borrow from the solo 401k plan. Effective for plan years beginning on or after January 1, 2002, solo 401k participants may take loans from their solo 401k plans. To learn more about the solo 401k distribution rules, VISIT HERE.
