Why Might You Need to Take a Distribution?
You may need to make a distribution from your Solo 401(k) for various reasons. Common scenarios include reaching retirement age and beginning to draw income, encountering a financial hardship, or deciding to roll over funds into another retirement account.
Additionally, if you're closing your Solo 401(k) plan, you’ll need to distribute or roll over the assets to complete the plan termination process.
Will I Pay Taxes?
Whether you pay taxes depends on the type of funds being distributed and the nature of the distribution. Distributions from pre-tax (Traditional) Solo 401(k) funds are generally taxable as ordinary income. Roth funds, on the other hand, are typically tax-free if certain conditions are met (e.g., you're over age 59½ and the account has been held for at least five years). Early distributions before age 59½ may also trigger a 10% early withdrawal penalty, unless an exception applies.
How Do I Pay Taxes to the IRS on My Distribution?
When you take a distribution, your Solo 401(k) plan administrator (you, in a self-directed plan) should issue IRS Form 1099-R reporting the distribution. You’ll use this form when filing your tax return. If taxes are due, they’ll be paid as part of your regular income tax filing process. In some cases, you may need to make estimated tax payments to the IRS during the year the distribution is taken.
What Are the Different Types of Distributions?
Taxable Withdrawal: A direct cash-out of pre-tax funds. These are typically subject to income tax and possibly an early withdrawal penalty.
Early Withdrawal: A taxable distribution taken before age 59½, often subject to the 10% IRS penalty unless a qualified exception applies.
Rollover to Another Retirement Plan: A tax-free transfer of assets from your Solo 401(k) to another qualified plan, such as a Traditional IRA. This must be executed properly to avoid taxes or penalties.
In-Plan Roth Conversion: Moving pre-tax funds into the Roth bucket within the same Solo 401(k) plan. Taxes are due in the year of conversion, but future qualified withdrawals will be tax-free.
Step-by-Step Instructions to Complete the Distribution Form
Part I: Participant Information
Begin by providing your personal details:
Full Name: Enter your legal name.
Address: Include your current mailing address, city, state, and ZIP code.
Social Security Number (SSN): Input your SSN for identification purposes.
Date of Birth (DOB): Provide your birth date in MM/DD/YYYY format.
U.S. Citizenship Status: Check the box if you are a U.S. citizen.
Account or Plan Number: Your plan number for Solo401k is 001.
Part II: Eligible Rollover Distributions Payment Options
Select your preferred method for receiving the distribution:
Direct Payment to You: Receive the funds directly.
Direct Rollover: Transfer the funds to another qualified plan or IRA.
Combination: Split the distribution between direct payment and rollover.
For each option, specify the dollar amount or percentage (%) you wish to allocate.
Part III: Deferred Distribution
Choose an option to postpone receiving your distribution:
Part IV: Payment Instructions
Detail how you would like to receive your distribution:
Mailing Address: Provide the address if opting for a physical check.
Banking Information: Include account and routing numbers for direct deposit.
Special Instructions: Note any specific handling requests.
Part V: Direct Rollover Instructions
If opting for a direct rollover, furnish the following details:
Receiving Plan Type: Specify the type (e.g., IRA, 401(k), Roth IRA).
Plan or IRA Name: Provide the name of the receiving plan.
Financial Institution: Name the institution managing the receiving plan.
Trustee/Custodian Name: Identify the trustee or custodian.
Trustee/Custodian Address: List the full address.
Part VI: Taxation of Distributions
Federal Tax:
Distributions are generally taxed as ordinary income.
A 10% early withdrawal penalty applies if under age 59½.
A mandatory 20% federal withholding is applied unless you opt for a direct rollover.
State Tax:
State income tax withholding may apply based on your residency.
You can request additional withholding amounts.
International Distributions:
A 30% withholding applies to distributions sent outside the U.S.
Submitting a valid IRS Form W-8BEN can reduce or eliminate this withholding.
Withholding Elections:
You may elect additional dollar amounts or percentages to be withheld for both federal and state taxes.
Part VII: Outstanding Loan Payoff
If you have an outstanding loan balance, select which option best suits your specific situation and how you will proceed.
Part VIII: Participant's Acknowledgment and Signature
Review the form thoroughly, then:
Sign and Date: Confirm your understanding and agreement by signing and dating the form.
Part IX: Plan Administrator's Acknowledgment
Review and Approval: You serve the role of 401k plan administrator so you'll sign and date this section.
If you need any more help or to ensure compliance with specific plan requirements, please consult your CPA.
Disclaimer: Nabers Group is not a plan administrator or custodian. We do not calculate your required tax withholding or hold back any taxes. Please work closely with your CPA to determine if any taxes or early withdrawal penalties apply.