Solo 401k Contribution and Distribution Question

QUESTION: It just occurred to me, after 35 years on this earth, I think I have just figured something out.  The $17,000 Solo 401k contribution limit specifically says “deferred.” Does that mean I have to pay taxes on it when I eventually withdraw, and that, by waiting till retirement age, the only thing I am avoiding is the early withdrawal penalty?

Thank you, BK

ANSWER:  It comes down to choosing to pay taxes up front or later.

If you apply the deferral portion as a Roth Solo 401k contribution, you do not take a tax deduction up front; however, the earnings and principal can be distributed tax free 5 years after the first Roth Solo 401k contribution was made and after satisfying one of the following conditions:

  • Attainment of age 59 ½,
  • Disability, or
  • Death

On the other hand, if you treat the Solo 401k plan deferral amount as a pretax contribution, it will reduce your taxable income for the year since it is deductible, but you will have to pay taxes on the principal and gains once distributions commence, usually at retirement, in order to avoid the 10% premature distribution penalty.

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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