Solo 401k Distribution Rules: Profit Sharing vs. Employee Salary Deferral

A solo 401k plan consists of both employee contributions and profit sharing contributions and both have separate distribution rules.


Employee contributions under a 401(k) plan are subject to more restrictive provisions than profit sharing dollars. Elective deferrals generally may not be distributed including processing a transfer to an IRA before one of the following triggering events occurs:

• attainment of age 59½,
• plan termination

Employer profit sharing contributions can be distributed/transferred to an IRA after a 2 year holding period has met even if the participant is under age 59 1/2. However, if the participant is over age 59 1/2 the profit sharing contributions can be distributed/transferred to an IRA at anytime.

Lastly, the rules are more relax for amounts that have been transferred into the solo 401k from other IRAs or qualified plans. These amounts can be transferred out at anytime to an IRA or another 401k.

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SOLO 401K FAQs

SOLO 401K DO'S & DON'TS

Result of Change in Self-Employment Status on Solo 401k

QUESTIONS: If I were to change my federal tax status to be taxed as an S-corp (I have an LLC taxed as sole proprietor now), would that effect my solo 401k? If so how?

ANSWERS: It would effect how contributions are calculated. Please see the following.

The annual solo 401k contribution limits as determined by the type of entity sponsoring the solo 401k plan.

• If the entity type is a Sole Proprietor, the starting figure for calculating the annual solo 401k contribution is line 31 of Schedule C.
• If the entity type is a C-Corporation, the starting figure for calculating the annual solo 401k contribution is W-2 income.
• If the entity type is an S-Corporation, the starting figure for calculating the annual solo 401k contribution is W-2 income.
• If the entity type is a Partnership, the starting figure for calculating the annual solo 401k contribution is K-1 (Form 1065) line 14.

ANSWERS CONTINUED: It would also effect the solo 401k contribution deadline in the following fashion.

The self-directed Solo 401k contribution deadlines are driven by the type of entity sponsoring the self-directed solo 401k.

• If the entity type is a Sole Proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is filed.
• If the entity type is an LLC taxed as an S-Corporation, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
• If the entity type is an LLC taxed as a Partnership, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
• If the entity type is an LLC taxed as a Sole Proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is filed.
• If the entity type is a Partnership, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
• If the entity type is an S or C-Corporation, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.

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SOLO 401K FAQS

SOLO 401K VS SELF-DIRECTED IRA

Debit Card for Solo 401k and In-Plan Roth solo 401k Conversion

Q 1.  Is it OK to use a Debit card with the solo 401K?

ANSWER: While a debit card is allowed and a credit card is not, Fidelity does not offer a debit card for a solo 401k, but Wells Fargo does. 

Q 2.  I am planning to buy a rental property with the traditional SOLO 401K and would like to roll it over to the Roth 401K in the future.  Can I transfer half on December 31 and the other half on January 1 so that I spread the rollover taxes over 2 years?

ANSWER: Yes you can process partial in-plan roth solo 401k conversions, but they must be formally documented using an in-plan roth 401k conversion form. Also, the property being converted must be appraised prior to the conversion so the correct solo 401k conversion amount is reported on Form 1099R.  

How does the Solo 401k Owner/Participant Report the in-plan Roth conversion on his or her personal tax return?

If tax payer files Form 1040, report Roth Solo 401k conversion amount on line 16a and 16b.

If tax payer files Form 1040A, report Roth Solo 401k conversion amount on line 12a and 12b.

If tax payer files Form 1040RN, report Roth Solo 401k conversion amount on line 17a and 17b.

 ADDITIONAL RESOURCES

Solo 401k FAQs

ROTH Solo 401k

The 20% mandatory federal tax applies to Solo 401k Distributions

QUESTION: After I process a solo 401k loan, I need the remaining 1/2 of the solo 401k funds for less than 60 days. My understanding is that I can withdraw it and put it back as a roll over. Is that correct?

ANSWER: It is not quite that simple as a mandatory 20% for federal taxes must be withheld at the time of the solo 401k distribution with the funds wired to the Department of the Treasury; as a result, you only end up with 80% that can be rolled over, unless you can come up with the other 20% with outside funds.  This rules is different when compared to an IRA, as IRAs are not subject to the mandatory 20% withholding.

See the following language from the following IRS website.

http://www.irs.gov/Individuals/International-Taxpayers/Pensions-and-Annuity-Withholding

Eligible Rollover Distributions

Withhold 20% of an eligible rollover distribution unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. With certain exceptions, an eligible rollover distribution is the taxable part of any distribution from a qualified plan, governmental Internal Revenue Code section 457(b) plan, tax-sheltered annuity, or IRA. For more information, refer to Chapter 8 in Publication 15-A, Employer’s Supplemental Tax Guide.

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Solo 401k FAQs
Solo 401k Distributions