The social-security payments increased in 2024 by 3.2 percent and will begin with benefits payable to Social Security beneficiaries in January 2024. Referred to as the cost-of-living adjustment, or COLA, the increase to the Social Security payments which occurs on an annual basis may increase your taxes and also indirectly impact your distributions from IRAs and solo 401k plans. Reason being, Distributions from retirement plans including solo 401(k) plans are taxed at earned income tax rates not capital gain tax rates. For this reason, unless you are required to make RMDs from your solo 401k because you are age 73 or older, it may be best to make distributions from other funds such as personal brokerage accounts as capital gains apply which are generally lower than ordinary income taxes. Long-term capital gains are taxed at a lower capital gains tax rate, generally between 0% and 20%, if you held the investments over a year.
Lastly, if you don’t have a personal brokerage account and have no choice but to take a distribution from your solo 401k, consider making the distribution from the Roth solo 401k portion. However, in order to make a distribution from your Roth solo 401k, you must meet a triggering event such as being age 59 1/2 or older. What is more, it is best to first wait until you have had the Roth solo 401k for both 5 years and are 59 1/2 or older so the distribution is treated as a “qualified Roth solo 401k distribution,” meaning taxes won’t be due on the earnings.
