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Required minimum distributions

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Required Minimum Distributions (RMDs) are the minimum amounts that must be withdrawn from your retirement accounts each year, once you reach a certain age.

  • You are responsible for taking your RMDs, withholding the taxes from your RMDs, and reporting your RMDs
  • These amounts will be included in your taxable income, except for parts, if any, that were after-tax or Roth
  • RMDs must be taken whether you are still active in the business or not

Where do I take RMDs from?

In general, RMDs must be taken from:

  • Your traditional IRA, SEP IRA, or SIMPLE IRAs
  • Your traditional account(s) within your employer-sponsored plans, such as your Solo 401k

Per the SECURE Act 2.0:

  • Your Roth IRAs and Roth 401ks, such as your Solo 401k Roth account(s), do not require minimum distributions, until after the death of the account owner
  • RMD rules do apply, however, to beneficiaries of your Roth IRAs and Roth 401ks

At what age do I start taking RMDs?

When you reach the age of 73:

  • Your first RMD must be taken by April 1st of the year following your 73rd birthday year
  • Subsequent RMDs (for each year after your first RMD) must by taken by December 31st

Note the following example from the IRS:

If you reach age 73 in 2024:

  • Your first RMD is due by April 1, 2025, based on your account balance on December 31, 2023, and
  • Your second RMD is due by December 31, 2025, based on your account balance on December 31, 2024.

How do I calculate my RMDs?

  • RMDs for your Solo 401k must be calculated separately from your IRAs
  • The following RMD calculator can be used as a general guide, but all totals should be confirmed with your CPA:

RMD calculator

How do I take, withhold taxes on, and report my RMDs?

  • As Plan Administrator, it is your responsibility to withhold taxes and report all distributions to the IRS:

Withholding 20% Tax on Distribution

Additional resources

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

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

Filing Form 5500-EZ if the value goes down

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If I file Form 5500-EZ now, does that obligate me to file subsequent 5500-EZ forms for the following years even if the total plan assets are below 250k?

Answer:

No.  Form 5500-EZ is required only if the total value of the 401k plan is $250,000 or above by the end of year.

Filing the 5500-EZ is not required if the total plan assets are below $250,000 by the end of the year, even if the form has been filed for the previous year.

As noted in the IRS instructions for Form 5500-EZ:

You do not have to file Form 5500-EZ for the 2016 plan year for a one-participant plan if the total of the plan's assets and the assets of all other one-participant plans maintained by the employer at the end of the 2016 plan year does not exceed $250,000, unless 2016 is the final plan year of the plan.

Solo 401k account statement

We are applying for a new mortgage and the lender would like to see a quarterly statement for our retirement accounts. I spent some time yesterday and prepared a "snapshot" by generating a report from Quickbooks (I use this software to track my Solo 401k balances and transactions) but they would not accept that. The underwriters for the loan are wanting to see a statement like they are used to.  I am not a financial guru and not certain what a "typical statement" would include in their minds.  Do you have anything prepared that I could plug my numbers into?

Answer:

Yes, we have a template that you can use:

Solo 401k statement SAMPLE.xlsx

Please note the following instructions to properly complete the statement:

  • Download the file and save it on your hard drive.
  • Open the file and edit the cells that are highlighted in yellow. Do not edit any other cells since the sheet includes formulas.
  • Insert your plan information. Refer to your Adoption Agreement document and copy any required information from there.
  • Account number: for the first portion, use the plan number (usually 001).  The second portion of the number should be the last 4 digits of your Social Security Number.
  • After you finish editing, double-check for accuracy.
  • Remove the yellow highlights and save the file.
  • Save the file in PDF format. You can then provide the PDF file to the person requesting the statement. Do not send it in Excel format. There are free software versions on the web which would allow you to convert to PDF. If for some reason you are unable to save it as a PDF, you can print the file and then scan it or send it via fax.

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

Correcting a prohibited transaction

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Under Internal Revenue Code a penalty tax is assessed equal to 15 percent of the amount involved in the prohibited transaction. After the prohibited transaction has been identified, it must be corrected immediately - certainly within the taxable year. However, if the prohibited transaction is not corrected during the taxable year, then an additional penalty tax in the amount of 100 percent of the prohibited transaction amount will apply.

Correcting the prohibited transaction means to undo the transaction to the extent possible and in any case to make good to the plan or affected account any loss resulting in the transaction, by restoring to the plan or affected account any profits made through the use of the plan assets. The plan must be placed in a financial position no worse than if the disqualified person had acted under the highest fiduciary standards (IRC Sec. 4975(f)(5) and ERISA Sec. 502(i)).

What if I want to hire employee(s) in the future?

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I know the Solo 401k is only for self-employment businesses without employees (other than the owner). What if I want to hire employee(s) in the future?

Answer:

The Solo 401k plan is an Owner-Only plan. You cannot set up a Solo 401k/ Owner-Only plan if you have full-time employees or long-term part-time employees (Long-term part-time employees are defined as those who work over 500 hours within a 12-month period for 2/3 consecutive years). The only exception is a spouse who also works for the business.

If you would like to hire employee(s) in the future, please remember that the employee must work under 500 hours in a 12-month period. Otherwise, you may become ineligible for the Solo 401k plan.

To ensure compliance, it is important that you, as the employer, do two things:

  • Notify Sense Financial Services immediately if you have hired an employee (other than your spouse). Having an employee will require your plan documents to contain eligibility criteria. Unless you have notified us, your plan documents do not contain this eligibility criteria. It is important to notify us as soon as possible so your plan documents can be updated to reflect this change.
  • Keep track of the number of hours that the employee works in a 12-month period. Once the employee hits 500 hours within a 12-month period and does so for 2/3 consecutive years, he/she automatically becomes eligible for the Solo 401k plan. This causes you to become ineligible for the Solo 401k plan.

If you do hire full-time employees who meet the eligibility criteria, you must offer them the same benefits (e.g. a 401k plan). The Solo 401k is not set up to have any other employees besides the owner and his/her spouse. With full-time employees, you will have to terminate the Solo 401k plan and switch to a 401k plan which can include employees.

If you decide to terminate your Solo 401k plan, you will have to file a final 5500-EZ form with the IRS and transfer the funds out to another qualified plan. If you have assets in your Solo 401k plan such as real estate, you will need a self-directed type of plan or account to transfer your funds into. Most retirement plans will not accept assets such as real estate.

Self-directed 401k plans which include employees are expensive to maintain. Though it is possible, you may not want to go that route. Your two best options would then be:

  • Terminate the Solo 401k plan.  Set up a self-directed IRA and transfer all of your assets including real property into it.
  • Freeze your Solo 401k plan when you have eligible employees. Freezing a plan allows you to maintain your investments and continue to manage it as the trustee. However, you can no longer contribute to the plan. Freezing the plan is meant to be a temporary measure.

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.

Filing a 1099 for a contractor working on a property owned by my 401k

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Do I need to get a tax ID from a contractor working on a property in my 401k so that I can file and submit 1099 to the IRS?

Answer:

According to the IRS if you pay independent contractors, you have to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business. 401k is not considered your trade or business but we suggest that you confirm with your CPA regarding filing requirements.

Performing a Roth conversion

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IMPORTANT: Please speak with your CPA prior to performing a Roth conversion in order to understand the tax consequences. This is a taxable event. 

For more information on Roth conversions, review our Knowledge Base articles.

If you would like to perform a Roth conversion, please do the following:

  • Open a separate 401k account for the Roth funds, if you do not have one yet

From a banking standpoint, the Roth account is established in the same way as the pre-tax account, i.e. in the name of the 401k and using the EIN of the 401k.

The separate account is simply to keep the Roth funds separate from the pre-tax funds. Separate accounts are strongly recommended for ease of accounting.

Bank Account Set Up
  •  Move the funds from the pre-tax 401k account to the Roth 401k account

This must be completed by the end of the year (e.g. December 31, 2025) to claim the Roth conversion for the year (e.g. 2025).

The completed form is not given to anyone else; it will be kept in your file as part of your recordkeeping as Plan Administrator.

  • Report the Roth conversion through Form 1099-R

As Plan Administrator, you are responsible for the filing of Form 1099-R for your plan. The Roth conversion will be included as part of this year's taxable income.

Form 1099-R Instructions

Note: you are not able to rollover pre-tax funds from your previous retirement account directly into the Roth account for your Solo 401k.

For a Roth conversion, you must first rollover pre-tax funds into the pre-tax account of your Solo 401k. You can then perform the conversion and move the funds into the Roth account of your Solo 401k.

Loan interest payments as tax deductions

When repaying the Participant Loan, can the interest portion of the payments be used for tax deductions?

Answer:

No, I don't believe that interest payments on the participant loan can be deducted on your tax return, unless the loan is used to purchase a primary residence. We are not qualified to provide tax advice and recommend that you consult with your CPA or tax advisor regarding this question.

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