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Distributions

Important deadlines

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As year-end is approaching, please note the following important upcoming deadlines:

Contributions Deadline:

Plan owners must formally elect to make contributions before December 31st. Depending on your business type, you may also be required to make employee elective deferral contributions before December 31st. We’ve put together a summary for you that answers common questions about contributions. In order to review this information, click on the link below:

Contribution Basics

Form 1099-R:

If there is a distribution or a Roth conversion within your Solo 401k plan in 2023, Form 1099-R will need to be issued from your Solo 401k by January 31, 2023. Distributions and Roth conversions are taxable events and need to be reported to the IRS. You can find Form 1099-R on the client portal:

Forms to Administer Solo 401k Plan

Sense Financial can assist with creating 1099-R forms. If you would like us to help create this form for your plan, please let us know by Tuesday, January 9, 2023.

We will need a copy of a completed In-Plan Roth conversion form and/or the completed Distribution form in order to prepare your 1099-R. These forms can be located at the link above. Send your documents to clients@sensefinancial.com no later than January 9th.

Deadline to receive Required Minimum Distribution (RMD):

Plan participants who turned 72 years old in 2023 are required to take their first required minimum distribution (RMD) before April 1, 2023.

To determine the amount of distribution you must take, please click on the RMD calculator below:

RMD Calculator

As the plan administrator it is your responsibility to withhold the taxes and report the distribution, learn more here:

Withholding 20% Tax on Distribution

Sponsor Reporting:

As the document sponsor of your Qualified Plan, we are preparing to submit our annual report to the IRS. The report will list all 401k plan sponsors using our documents.

If there has been any changes in your situation (e.g. change in the business type, address, addition of employees, etc.) please let us know by Monday, December 20th. Our goal is to provide you with the help and guidance needed to keep your plan in compliance. If you have any question, please don't hesitate to let us know.

Reporting CARES Act distributions and repayments

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The IRS has released Form 8915-E and 8915-F for the reporting of CARES Act distribution(s) that were taken in 2020, their repayment, or their inclusion in income.

If you took a CARES Act distribution in 2020, note which form(s) would apply to you:

Form 8915-E is used to report:

  • If you took a CARES Act distribution in 2020

Form 8915-F is used to report:

  • Your income in 2021 if you took a CARES Act distribution in 2020 and have been including in your income in equal amounts over 3 years and that 3-year period has not yet lapsed
  • Your repayments of a CARES Act distribution, if repaying the distribution

Note that repayment of the CARES Act distribution can be done over 3 years, starting with the day after the distribution was received. Repayment(s) can occur through multiple payments or one lump sum payment by the end of those 3 years. If the entire CARES Act distribution is paid back within that time, the distribution will not be taxed.

You will want to request your CPA’s assistance in completing the appropriate form for your situation. 

More information on these two forms can also be found at:

https://www.irs.gov/forms-pubs/about-form-8915-e

https://www.irs.gov/forms-pubs/about-form-8915-f-qualified-disaster-retirement-plan-distributions-and-repayments

CARES-ACT

The CARES Act and the Solo 401k

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020 to provide short-term financial relief to those who have experienced adverse financial consequences from the current pandemic. The CARES Act includes expanded provisions for Coronavirus-related distributions and participant loans.

Solo 401k owners can utilize these expanded provisions under the CARES Act if they qualify.  Pursuant to section 2202(a)(4)(A)(ii) of the CARES Act, a qualified individual for purposes of this notice is an individual:

  • who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this notice as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
  • whose spouse or dependent (as defined in section 152 of the 5 Code) is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act; or
  • who experiences adverse financial consequences as a result of:
    • the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
    • the individual being unable to work due to lack of childcare due to COVID-19; or
    • closing or reducing hours of a business owned or operated by the individual due to COVID-19.

In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of Notice 2020-50 is an individual who experiences adverse financial consequences as a result of:

  • the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • the individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

If a Solo 401k owner meets one of the qualifications above, he/she may rely on self-certification. A self-certification form must be completed by the Solo 401k owner and then kept in his/her file as Plan Administrator of the Solo 401k.

Coronavirus-related distribution provisions

  • Up to $100,000 can be taken as a distribution from the plan (if the employer is a member of a controlled group, the $100,000 maximum applies to the aggregated limit over all plans maintained by the controlled group)
  • 10% early withdrawal penalty is waived
  • Normal taxation applies on a distribution of traditional/pre-tax funds
  • Payment of tax on distribution can take place over 3 years, starting with the 2020 tax filing
  • Repayment of entire distribution can be done over 3 years starting with the day after the distribution is received. Repayment can occur through multiple payments or one lump sum payment by the end of those 3 years. If entire distribution is paid back within that time, the distribution will not be taxed.
  • Applies to qualifying distributions taken from January 1 through December 31, 2020

Coronavirus-related loan provisions

The loan provisions of the CARES Act apply to determining the maximum loan amount and delaying the repayment of new and existing participant loans from the Solo 401k.

  • Determining the maximum participant loan amount
    • Applies to a new loan taken between March 27 – September 22, 2020
    • Up to $100,000 or 100% of the participant’s vested account balance, whichever is less, can be taken as a new participant loan
  • Delaying the repayment of new and existing participant loans
    • Applies to loan repayments on new or existing participant loans
    • Loan repayments that are due between March 27- December 31, 2020 may be delayed up to 1 year
    • Loan payments will resume with any payments due on or after January 1, 2021
    • Interest continues to accrue within the repayment period
    • Loan repayments must still occur in level payments; no lump sum repayment can occur at the end of the loan repayment period
    • Skipped payments (plus interest on those skipped payments) must be repaid starting on the 1-year anniversary of the first skipped payment
    • The maximum repayment period will be extended by the time frame in which payments were skipped, e.g. up to 1 year

Action items for Solo 401k owners

  • Determine if you are a qualified individual under the CARES Act
  • If you qualify, complete a self-certification form and keep it in your file
  • If you are a member of a controlled group, track aggregate amounts of your Coronavirus-related distributions so as not to exceed the maximum
  • If you take a Coronavirus-related participant loan, document and track any delayed repayments to the loan
  • If you take a Coronavirus-related distribution, determine and track repayments, if applicable

Sense Financial will continue to update this page as additional guidance from the IRS and the DOL is expected in the future.

RELATED RESOURCES:

Required minimum distributions

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At what age do required minimum distributions begin for the Solo 401k?

Answer:

Required Minimum Distributions (RMDs) are minimum amounts that retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022). This is true whether you’re still active in the business or not.

You have to calculate RMD for your Solo 401k separately from an IRA. For more details regarding RMD, please consult with your CPA and visit the following IRS page:

https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans

For your convenience, we have a RMD Calculator on our website:

RMD Calculator

As the plan administrator it is your responsibility to withhold the taxes and report the distribution, learn more here:

Withholding 20% Tax on Distribution

How do I terminate my Solo 401k plan?

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ANSWER:

Terminating your Solo 401k plan includes the following steps:

  • Distribute all assets of your Solo 401k plan

Distributions may be taxable or non-taxable, depending on the type of distribution taken. 

  • Formally request to terminate your Solo 401k plan

You must submit a request to us in writing for the termination of your Solo 401k plan.

  • We will issue a Plan Termination package to you

The plan termination package includes two documents which will be emailed to you- the Action by Board of Directors document and the Plan Termination package.

  • Sign the documents and keep them for your records

Since you are Plan Administrator, you are responsible for keeping all records related to the Solo 401k plan.  This includes the termination documents.

  • Prepare the filing for the year in which the Solo 401k plan was terminated

If you are terminating your Solo 401k Plan this year, you will have to complete the following forms next year.  Obtaining, completing, and submitting these forms are your responsibility.

  1. A 1099-R is required for both taxable distributions and non-taxable rollovers.  This form must be distributed to the recipient of the distribution in January of the year following the distribution or rollover.
  2. A final 5500-EZ is required for all terminated 401k plans

Charitable donation from my 401k

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Is it possible to make a charitable donation from my 401k to a church or another non-profit without tax-consequences?

Answer:

If you plan to include retirement assets in a charitable donation, you should consider how it may affect your finances. In some cases, it can be more beneficial to designate the charity of your choice as the beneficiary of your retirement account. It also might be possible to direct a distribution to a charity.

Please consult with your CPA for details as we are not qualified to provide you with tax advice.

Withholding 20% Tax on Distribution

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I would like to take a distribution from my Solo 401k plan. How do I withhold and report the taxes to the IRS?

Answer:

As the plan administrator, it is your responsibility to withhold the taxes and report the distribution

You will need to do the following:

1.  Withhold the taxes and remit them using the Electronic Federal Tax Payment System (EFTPS) method

The EFTPS is a free service provided by the US Department of Treasury:

EFTPS: The Electronic Federal Tax Payment System

  • Enroll in the EFTPS system at: www.eftps.gov
  • Sign up and then make all your withholdings in the quarter in which you make a distribution. Taxes must be paid electronically.
  • Enroll as a "business" and use the name and EIN of the 401k
  • For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. The number can be used as a receipt or to trace the payment.
  • The taxes must be paid by the 15th of the month following the date of the Solo 401k distribution

If you do not withhold the mandatory 20% tax at the time of distribution, you would then pay the taxes with personal funds at the time of tax return.  But again, 20% tax withholding is mandatory.

2.  File Form 945 by January 31st to report and reconcile what you have withheld

Form 945 Instructions

See "Where To File" for information on how to file Form 945 electronically or via paper form. Only one Form 945 should be filed per year.

3.  Report the distribution by issuing Form 1099-R from your plan

The 1099-R is filed in the year following the year in which the distribution was performed (e.g. the 1099-R for 2022 is filed in 2023). There are two deadlines for the 1099-R:

  • The Payee/recipient copy must be received by January 31st
  • The electronic copy must be filed with the IRS by March 31st

You are responsible for the filing of the 1099-R by both deadlines.

Sense Financial can assist with the filing of the 1099-R by request only, provided that we receive your request by our deadline of the second Monday in January.

Please contact your CPA for assistance in calculating the withholding and the reporting of federal income tax withholdings.

Taking property out of a Solo 401k plan as an in-kind distribution

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My Solo 401k plan owns a real estate property. I would like to pull this property out after retirement as a distribution. Can I do that and what are the specifics?

Answer:

You can distribute the real estate property from the Solo 401k plan. This is known as an in-kind distribution.

An in-kind distribution is still subject to income taxes and early distribution penalties if you are under normal retirement age at the time of the distribution.  The end result is that you now own the real estate personally, outside of the Plan. You can thus use it personally (as residence or rental property, for example) because it is no longer held in the Solo 401k.

IMPORTANT: Before processing an in-kind distribution of real estate from your Solo 401k plan, the property must be appraised in order to ensure income tax and early distribution penalty is paid on the correct value. Not obtaining an appraisal on the property prior to the in-kind distribution may subject you to payment of back taxes if the real estate property was worth more at the time of the distribution.

Can I take a distribution from my Solo 401k?

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Can I take a distribution from my Solo 401k? Will I owe taxes? At what age can I distribute from my Solo 401k without penalty?

Answer:

You are eligible to take a distribution from your Solo 401k after you reach age of 59 1/2. The Normal Retirement Age (NRA) for the Solo 401k Plan is 60 years old.

The distribution form can be accessed here:

Forms to Administer Solo 401k Plan

Early distributions (those taken before Normal Retirement Age) from the Solo 401k will incur penalty in addition to taxes. Unless you are taking distributions from a Roth account, you will be taxed on the amount that you take out. Please review the following regarding withholding mandatory 20% tax:

Withholding 20% Tax on Distribution

Distributions are taxable and reportable and must be reported to the IRS on a form 1099R. We can assist you in filing this form electronically with the IRS as long as you contact us before the deadline (typically in the middle of January). 

Consult with your CPA or tax advisor for more information on the effect of distributions from your Solo 401k.