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