Saturday, December 8, 2012

Roth Solo 401k Distribution Question




QUESTION: When I open Solo 401k, what is the waiting period for not having to pay taxes on distributions.  I am 57 and 1/2 now.  I plan on paying taxes now on the funds I put into the solo 401K, don't need the tax deduction right now.  Is there a 5 year rule like there is for the Roth IRA?

ANSWER:  When making distributions from the Roth portion of the self-directed Solo 401k, you need to consider two sets of  IRS Roth Solo 401k distribution rules, which are:

You may distribute the Roth Solo 401k contributions anytime without paying taxes  but will be subject to the 10% early distribution penalty if you are under age 59 ½ at the time of the Roth Solo 401k distribution.  Of course, federal taxes will not apply since Solo 401k Roth contributions are made up of salary deferral and after-tax contributions, i.e., you didn’t take a tax deduction when you made the Roth Solo 401k contributions.

With respect to making Roth Solo 401k distributions consisting of both contributions and earnings, provided the five year Roth Solo 401k clock is satisfied, you can distribute both the Roth Solo 401k contributions and earnings tax and penalty free.

The five year clock commences the date that you made your very first Roth Solo 401k  contribution and is treated as of occurring as of January 1 of the year the contribution was made  regardless of when in the year the Roth Solo 401k contribution was made. For example, if you make a Roth Solo 401k contribution on 12/31/2012, it will still be treated as having been made on 1/1/2012.  Therefore, you will be able to take a qualified Roth Solo 401k  distribution of principal and earnings on January 1, 2017 since the 5 year waiting period would have been satisfied and  you will be over age 59 ½.  In sum, you must satisfy the 5 year period and be age 59 ½ or older in order to treat the Roth Solo 401k distribution as a qualified Roth Solo 401k distribution.

Thanks,
Alan

No comments:

Post a Comment