When you retire, the questions start piling up. Do you have enough money to live on? Did you pick the best retirement plan? Are you taking too much out of that retirement account? As strange as it may sound, there’s a fourth question that also needs to be answered. Are you waiting too long to take money out of your account?
We know that’s not the first thing you think of, but there’s a legal reason to ask. According to federal law, you have to start withdrawing from your retirement account by a certain point in order to avoid penalties. You also have to take out a specific amount of money each year. But it’s not as simple as one size fits all. In fact, there are different deadlines for most types of accounts, when it comes to the Required Minimum Distribution. So what are the rules for a Solo 401k RMD? Let’s take a look.
When does the clock start?
First off, everyone with a Solo 401k has to start withdrawing by the same date. When the calendar reaches six months after your 70th birthday, regardless if you’re retired or not, that’s when the clock starts.
Now here is where the deadline gets specific. For that first withdrawal, you get a bit more time than normal. For example, let’s say your birthday is in June. If you turn 70 in June 2019, then your clock starts in December of this year. The IRS then gives you until April 1, 2020 to collect that first RMD on your Solo 401k.
That extra time is only for the first collection. After that, as the IRS says on its website, “for all subsequent years, you must take the RMD by December 31.”
Now yes, it’s true that for most employer-sponsored 401k plans, you don’t have to withdraw money if you’re still working for the company. But that doesn’t apply if you or your spouse own 5 percent or more of the company in question, so that rule is tossed out for anyone with a Solo 401k plan. Even if you’re still working with your business, you have to start pulling money from the plan by that April deadline. If you’re confused about a Solo 401k and wonder if you qualify, we can help answer that here.
What if you miss the deadline?
As for Solo 401k plan owners, what happens if you fail to meet the deadline? Well, then the federal government takes some of your money. The IRS website states if you miss the annual deadline, the department will levy an excise tax on your Solo 401k RMD. That means you’ll be giving the IRS 50 percent of the minimum amount you were required to withdraw.
If you qualify and you’ve already missed this year’s deadline, don’t panic. That penalty can be waived, as long as you’re able to show it was an honest mistake. You do however have to fill out a couple forms, which you can find here.
For anyone who is wondering, there is a minimum age as well as a maximum for when you can start distributions. As we mentioned, the maximum age is 70.5 years old. The minimum is 59.5 years old. If you try to take any money out before you’re 59, the federal government will charge a 10 percent penalty.
How much is my RMD?
How much does the IRS require to be withdrawn every year? The answer to that is different for everyone, due to how the number is calculated. The IRS takes your account’s balance as of December 31 and divides it by your age. For example, let’s say you’re looking to make your first required minimum distribution. As of December 31, 2018, there was $25,000 in your account and you are 70 years old. That comes out to a minimum of $357.14 you have to withdraw this year.
Is there a Roth Solo 401k RMD?
Yes, even the Roth Solo 401k has a required minimum distribution. Unlike the Roth IRA, you have to start taking money out of the Roth portion of your Solo 401k plan at age 70.5, too. You don’t have to pay taxes on those funds, if they are qualified distributions. But, you do still have to take money out of the Roth Solo 401k, just like you have to complete an RMD for the traditional funds portion of the Solo 401k.
A word of caution
You can take out more than that, but we would offer a word of caution. Be careful about taking out too much. Depending on what type of Solo 401k you have, your withdrawals could be included in your taxable income for the year. You can read more about the different types of Solo 401k accounts different types of Solo 401k accounts
While the IRS have worksheets like this one to calculate your RMD, the department won’t be sending you a notice. In fact, there is a notice in bold on the IRS website saying “the retirement plan account owner is ultimately responsible for calculating the amount of the RMD.”
It’s also worth pointing out that a Solo 401k RMD is never eligible for rollover. The required minimum amount has to be withdrawn once you reach 70.5 years old. However, as with many parts of the financial laws, there is a loophole. If you withdraw anything above the minimum, that extra money would be eligible for rollover for the first 60 days. So if you had to withdraw $357.14 and instead you took $500, that extra $142.86 could be rolled over within 60 days. If not, then you have to withhold income tax from that amount.
Why are these rules in place for the Solo 401k RMD? Well, there are two reasons. First, the idea is to make sure people don’t burn through all of their funds in one or two years. Instead, the IRS hopes to spread out the distribution over the course of the account owner’s lifetime. Second, the rules are to prevent people from deferring taxation on their accounts and simply leaving these retirement funds as inheritance.
If you have any questions about Solo 401k plans, such as how to invest, what options are available or anything else we haven’t covered, you can get more information at www.solo401k.com