The Solo 401k works just like any other retirement plan. Required Minimum Distributions (RMDs) are mandatory. As a general rule, RMDs are first taken on April 1st of the first calendar year after the plan participant (you) turns 70.5 years old.
It’s very important that you take your RMD payments from your 401k. Failure to receive an RMD (or receiving too little of a payment) can result in a 50% excise tax on the amount you were supposed to distribute.
RMDs are taxed as ordinary income at your regular income tax rate. By the time you reach age 70.5, you’ll probably have less income coming in so you’re usually taxed at a lower rate.
What if my Solo 401k funds are illiquid (Real estate)?
If funds are all in property, the RMD is done by distributing partial ownership to you personally. Taxes are then paid on the percentage of ownership transferring from the Solo 401k trust to you personally.
Is there any way to avoid RMDs? What if I’m still working?
With the Solo 401k, you are considered an owner-employee .This is a special role because you are both the employer and the employee at the same time.
While it’s true that you can delay RMDs if you continue to work…if, as an employee, you own more than 5% of the company sponsoring the 401k plan, then you must take your RMDs on schedule.
Resultantly, since you are both owner and employee, you must take your RMDs starting at age 70.5.
What about converting to a Roth 401k? Then can I avoid the taxes?
If you choose to begin converting your funds to Roth as you near retirement, you still have to pay the taxes to convert the funds to Roth. Even if you convert your 401k funds to Roth, any distribution before the 5-year waiting period will result in a penalty withdrawal – no matter your age.
I have to start taking RMDs but my spouse doesn’t. How does this affect us?
Beginning RMDs when your spouse is not taking RMDs is no problem. If you are continuing to participate in the 401k, you can continue to contribute to the plan from income coming in from your business, even while taking RMDs.