7 Things You Should Know about Solo 401(k) Distributions
The benefit of owning a self-directed Solo 401(k) is to leverage the tax-sheltered savings structure of the plan to create wealth for our golden years. When those retirement years arrive, we have the opportunity to draw down some of that savings to ourselves in the form of distributions.
But before taking any distributions, there are important rules and considerations you should know about your account. From early distributions to required minimum distributions, read on to discover 7 key considerations for Solo 401(k) distributions.
1. Early Distributions
The tax code discourages distributions prior to retirement age. Unless considered one of a handful of IRS allowed exceptions for severe financial hardship, qualified educational use, disability, or the first-time purchase of a primary residence, any distribution of tax-deferred 401(k) savings prior to age 59 1/2 will be subject to normal taxes as well as a 10% penalty.
With passage of the SECURE Act in 2019, a new exception was created allowing for a $5,000 non-penalized early distribution in the case of the birth of a child or adoption of a child under the age of 18.
2. Normal Distributions
Normal retirement age is 59 ½. After this point, you can start taking distributions from your plan without incurring a 10% penalty for early distribution.
You’re allowed to take distributions from your Solo 401(k) even if you’re still actively working in your self-employment business, and even if you are also continuing to make new plan contributions.
In most circumstances, you wouldn’t both contribute and distribute, but it’s technically feasible to do so.
Distributions from a tax-deferred account will be taxed as regular income to you. Qualified Roth distributions will be tax-free.
3. Qualified Roth Distributions
In order to have the full tax-free status accorded to Roth accounts, a Roth distribution must be deemed qualified. This means the distribution must be after a 5-year taxable period of participation, and after reaching age 59 ½.
If the distribution is taken by an inheritor after your death, or by you as a result of disability prior to age 59 ½, it will also be qualified.
This means that if you setup a Solo 401(k) at age 57 and make a Roth contribution in that first year, you must wait until age 62 before taking distributions in order for the entire amount to be tax-free.
If you setup a Solo 401(k) at age 50, but only made tax-deferred contributions until age 56, at which point you started making Roth contributions, then you would first be able to start taking fully tax-free distributions from the Roth account in your 61st year.
4. Non-Qualified Roth Distributions
If a Roth distribution is non-qualified, then the earnings portion of the distribution is taxable.
Unlike in an IRA where there is a first-in first-out logic applied to contributions, conversions, and earnings, all Roth 401(k) distributions are treated on a pro-rata basis. This means that if you have a non-qualified distribution, you must calculate which portion is non-taxable basis and which is taxable earnings.
To make this calculation, you will first determine the ratio of contributed Roth basis to the current value of the Roth account. If you contributed $20,000 over a period of years to the Roth account and it has now grown to $25,000, then any distribution will be 88% basis and 12% earnings.
If you were to distribute $5,000 in a non-qualified fashion, then $600 would be taxable and included as income on your tax return. The remaining $4,400 would be non-taxable.
5. Required Minimum Distributions
Starting in the year in which you reach 72 years of age, you are obligated to start taking Required Minimum Distributions (RMDs) from your Solo 401(k). Note that the 72nd year starting age first goes into effect after December 31st, 2019 per the SECURE Act. For those born before June 1st, 1949, the prior RMD starting age of 70 1/2 applies.
The requirement to take distributions applies to both the tax-deferred and the Roth accounts of your 401(k) plan. Because of this requirement to take distributions from a Roth 401(k), many investors will rollover their Roth 401(k) balance to a Roth IRA. A Roth IRA is not subject to Required Minimum Distributions.
When you’re subject to RMDs, you must use an IRS-mandated formula to determine the minimum amount that you must distribute from each plan account. This calculation is based on one of a handful of life-expectancy tables.
The table will provide a factor for each year of age that you multiply by the account value as of December 31st of the prior year.
If you have both tax-deferred and Roth accounts within your Solo 401(k), you must perform separate calculations and distribute accordingly from each account.
Failure to take the required distribution results in a tax penalty of 50% of the amount you should have distributed.
While you’re required to take a certain amount from your plan, you’re always able to take a larger amount if you choose.
6. Distribution Process
With a self-directed Solo 401(k), you are the plan administrator. This means you are responsible for recordkeeping to track the values of your respective plan accounts, executing plan distributions, and performing the necessary tax filings.
We strongly recommend you work with your licensed tax advisor on 401(k) distributions.
The act of taking a Solo 401(k) distribution is easy. You just issue funds from the plan to yourself.
However, on the back end, there are a few activities you need to document to make this a legitimate distribution.
If you have multiple accounts such as husband & wife or tax-deferred & Roth, you will need to update your plan ledger to indicate which participant account(s) funds were distributed from and update the current value of those accounts.
7. Reporting and Withholding
As the plan administrator, you must withhold 20% of the distributed amount. These withholdings must be made using the Electronic Federal Tax Payment System (EFTPS) by the 15th of the month following the distribution event.
IRS form 945 is filed by January 31st to report all withholdings in the prior tax year.
IRS form 1099-R must be produced and submitted to the IRS by February 28th in the year following distributions.
Distributions will also be reported on your personal tax return.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
