Solo 401k: Answers to your Year-End Required Minimum Distribution (RMD) Questions

Q. Which table do I use to calculate my Solo 401k RMD?

A. For lifetime distributions to Solo 401k participant, you have two tables to choose from:

Uniform Lifetime Table—this table is usually used if the Solo 401k Plan participant is not married; or

IRS Joint Life Tables—used if the Solo 401k participant’s spouse is more than ten (10) years younger than him or her and is the sole beneficiary the entire year.

Q. I don’t have enough liquid cash in my Solo 401k | Self-Directed 401k to take my RMD because all of my Solo 401k funds are invested in real estate. What should I do?

A. The IRS still requires that you take you RMD. Therefore, you will need to re-register part of the real estate by deeding it to your personal name to satisfy RMD, and report it on form 1099-R. Alternatively, you have option to sell part of the real estate and then distribute the proceeds to satisfy the RMD.

Q. I’m over 70 ½ years old but still self-employed. Do I still have to take required minimum distribution RMD from my Solo 401k | Self-Directed 401k?

A. Yes. The IRS requires the self-employed who have a Solo 401k to take RMDs. Confusion exists with respect to those who own less than 5% of the company not having to begin making distributions until April 1^st following the year you retire, but, again, this exception does not apply to the self-employed because you typically own more than 5% of your company.  

More RMD Information

The required minimum distribution (RMD) regulations require a Solo 401k participant to begin distribution no later than his required beginning date (RBD) and to continue such distributions over a period not extending beyond the life expectancy of the participant and a designated beneficiary.

The RBD for a Solo 401k participant is April 1 of the calendar year following the later of the calendar year in which the participant attains age 70 ½. If he fails to take the RMD, he would be subject to an excess accumulation penalty equivalent to 50 percent of the amount that should have been distributed but was not.
The RMD is typically calculated by dividing the account balance by the applicable distribution period. The account balance is generally the balance as of the last valuation date in the calendar year immediately preceding a year for which an RMD is due.

Calculating my Solo 401k RMD

For existing and prospective clients, we will calculate your RMD and prepare form 1099-R, the form used for reporting distributions including RMDs from Solo 401ks at no extra cost. Please e-mail us at info@mysolo401k.net if you would like us to calculate your RMD.

Lastly, visit our following blogs for more information on RMDs and Form 1099-R reporting.

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-plan-or-individual

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=how-to-calculate-solo-401k

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=reporting-distributions-from-solo-401k

http://www.mysolo401k.net/Blog-for-MySolo401k.html?entry=solo-401k-or-individual-401k

FDIC and SIPC Protection for: Self-Directed 401k | Solo 401k | Self-Directed Solo 401k

Retirement accounts including Solo 401k are federally insured up to $250,000 per bank.  This limit was increased from $100,000 to $250,000 by Congress in 2006.

Key Points of FDIC Coverage for Solo 401k | Self-Directed 401k

The $250,000 limit for federal deposit protection applies to Solo 401ks at banks and savings associations insured by the FDIC, and credit unions insured by the NCUA.

Pursuant to FDIC/NCUA regulations, all of one’s retirement accounts held at same insured bank are combined together and insure up to $250,000. 

Retirement accounts including Solo 401k are separately insured from other deposits held at same bank. For example, if in addition to a $250,000 Solo 401k, the participant has a $60,000 non-Solo 401k CD in her own name at XYZ bank plus a $95,000 non-Solo 401k CD at same bank in joint name with her husband, both of those accounts would be fully-insured because they’re under the $100,000-per-depositor-per –bank limit. The insurance for the non-Solo 401k accounts would be in addition to the $250,000 of insurance for retirement accounts at XYZ Bank.

FDIC Protection is Not Extended to Investments

Keep in mind that FDIC/NCUA insurance applies only to deposits such as checking accounts, savings accounts and CDs. As such, there is no federal deposit insurance for Solo 401k investments such as stocks, bonds, real estate, notes, etc.; even if they are purchased from an FDIC or NUCA insured institution.

SIPC Coverage

However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). This is an organization to which virtually all securities brokers belong. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 in cash. These reimbursements occur in cases of broker theft or the failure of a brokerage firm.

Solo 401k | Individual 401k Loan Default ad Offsets

Loan Default

For a Solo 401k plan loan (participant loan) to be granted an exemption from the IRS’s prohibited transaction rules, loan payments must be made according to a level amortized schedule with payments occurring at least quarterly. When a scheduled loan payment is not made by the end of the quarter in which it is due, the participant solo 401k loan goes into default. At this point, the plan may allow for a “cure period.” This cure period would give the Solo 401k plan participant until the end of the following quarter to catch up on payments.

Causes for Loan Default/ Distribution

A loan becomes a deemed distribution when:

 1) It has not been paid off within the maximum time frame (five years for most loans),

 2) a defaulted loan’s payments have not been caught up to date by the end of the cure period,

 3) a loan exceeds the maximum permissible amount, or

4) an event designated by the solo 401k plan, such as severance from employment, occurs.

Tax Consequences of Loan Default/Deemed Distribution

Even though a defaulted solo 401k loan is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs Insurance Contracts, etc., for the year in which the loan default (deemed distribution) takes place and normal tax consequences apply (including possible 10 percent early distribution penalty), a loan default/deemed distribution is not an actual distribution for all tax purposes.  Because this is not a true distribution, the defaulted loan cannot be rolled over into an IRA or another retirement plan. Additionally, after a deemed distribution, the loan is still considered a Solo 401k plan asset and may still be repaid. The Solo 401k loan continues to accrue interest, and that balance is used in determining the maximum loan amount available for any subsequent loans.  

Loan Offset Explained

A loan offset occurs when, under the terms of the Solo 401k plan loan, the participant’s accrued benefit is reduced by the amount of the outstanding loan (to “repay” the loan and enforce the plan’s security interest). As opposed to a loan default/deemed distribution, a loan offset is considered a distribution, the loan is no longer part of the plan assets, is not included as an outstanding loan when calculating the maximum loan available for a new loan, and cannot be repaid.

When can a loan be offset?

A defaulted loan can be offset only when there is a distribution trigger available to the participant under the plan. The participant must be eligible to take a distribution. Plans do have the discretion, however, to require loan offsets once a participant has reached a triggering event (e.g., death, disability, severance from employment) even if there has not been a default before the triggering event.

Tax Consequences of a Loan Offset

A loan offset is treated as a distribution for all tax purposes. The distribution is subject to income taxes, as well as any applicable penalty taxes, and is reported on Form1099-R. Provided that the offset takes place before a deemed distribution, it can be rolled over into an IRA or another retirement plan following the normal rollover rules.    

In-Plan Roth Rollovers aka Converting Solo 401k to Solo 401k Roth: Self-Directed 401k | Solo 401k | Individual 401k | Solo K

In-plan solo 401k Roth rollover defined

An in-plan Roth rollover is the movement of assets from your existing Solo 401k to a designated Roth Solo 401k account within your existing Solo 401k plan. Note that a Solo 401k plan is also referred to as a self-directed 401k, individual 401k or Solo K.

In-plan Roth rollovers resulted from the enactment of the Small Business Jobs Act of 2010.

Allowing for in-plan Roth rollovers

 
Only Solo 401k plans like the one offered by Mysolo401k.net that have designated Roth account option are permitted to offer in-plan Roth rollovers.

Process of doing an in-plan Roth Rollover

There are two ways to do an in-plan Roth rollover:

Direct rollover—as trustee of the solo 401k plan, by internally transferring an eligible rollover distribution from the Solo 401k plan’s non-Roth account to a designated Roth account in the same solo 401k plan, or

60-day rollover—by taking an eligible Solo 401k rollover distribution from the Solo 401k plan’s non-Roth account and subsequently depositing all or part of that distribution to a designated Roth account in the same Solo 401k plan within 60 days.

Recharacterizing (unwinding) an in-plan Roth rollover

The rules do not allow for the recharacteraztion of an in-plan Roth rollover (i.e., an in-plan Roth rollover cannot be returned to non-Roth status).

Distributions Types that qualify for in-plan Roth rollover

 1. Rollover contributions

 2.   After-tax contributions

 3. Employer profit-sharing contributions –but only when following   requirements are met:

•  Attainment of age 59 ½
• The employer contributions being converted have been in the plan for at least 2 years, or the participant has participated in the solo 401k plan for at least 5 years.

4. Salary deferrals (pre-tax elective deferrals)—only when you reach age 59 ½

Taxation of Solo 401k in-plan Roth Rollovers

Amounts processed as in-plan Roth rollovers are taxed in the same year and added to your gross income for the tax year.

In-plan Roth direct rollover is not subject to the 20% mandatory tax withholding; however, since you have to pay taxes either when you do the conversion or when you file your income tax return, it is recommended that you pay the 20% tax upfront to avoid having to increase your federal income tax withholding or make estimated tax payments to avoid underpayment of tax penalty.

The 10% early distribution tax does not apply to In-plan Roth rollovers at the time of processing. However, if withdrawn before a 5-taxable-year period the 10% may apply. Send us an e-mail at info@mysolo401k.net for more information on this.

Tax reporting in-plan Roth direct rollover

Reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc by:

• Including the amount you rolled over in box 1 (Gross distribution)
• Including the taxable amount you rolled over in box 2a (Taxable amount)
• Reporting your basis in the amount rolled over in box 5 (Employee contributions)
• Using distribution code “G” in box 7

Tax reporting in-plan Roth rollover on your tax return
You are required to:

• File Form 8606, Nondeductible IRAs, with your  tax return; and
• Complete Form 8606, Part III, to report your in-plan Roth rollover.