Self Employed 401k: What You Need To Know About Required Minimum Distribution

The day you start putting money into a self employed 401k is the day you start building a better retirement future. This plan, often called Solo 401k, offers a lot of benefits. Many real estate investors are taking advantage of its allowance for non-traditional investment classes. To make the most of the savings and tax deductible benefits, some people delay distribution as long as they can. However, there are certain regulations regarding required distribution that you need to know to avoid unnecessary penalties.

When does Required Minimum Distribution start?

Required Minimum Distributions are the minimum amounts that you must withdraw from your plan when you reach 70¹/₂ years of age, or when you decide to retire later. This applies to all qualified plans, traditional IRAs and IRA-based plans. Whether you have to receive distribution at the age of 70¹/₂ or whenever your retire is governed by the terms of the plan.

There are two exceptions for this rule:

– 5% owner of a company that sponsors the plan must receive distribution when they are 70¹/₂ years old, even if they are not yet retired.

– A Roth IRA doesn’t have any required minimum distribution until the death of the account holder.

How much is required minimum distribution from my self employed 401k?

The minimum distribution is calculated based on a lot of factors. When the plan holder is receiving the distribution, it is generally calculated by dividing the account balance to the remaining life’s expectancy.

To find out the required minimum distribution for your account, you can use a calculator tool available here.

Note that when the plan holder passes away, the required minimum distribution will change depending on who the beneficiary is and how they choose to treat the plan.

What happens if I receive less or more than the required minimum distribution?

Account holder can choose to take out more than the yearly required minimum distribution with no consequences, as long as the minimum amount for each year is met. Note that the additional distributed amount of this year cannot be counted for the minimum contribution for next year. That means, you have to meet the minimum level or more for each year.

In case the account holder fails to meet the minimum distribution, they would have to pay a stiff penalty tax of 50% on the amount that was not distributed as required. The penalty tax can only be waived if the account holder can prove that the failure to meet minimum distribution is due to reasonable error and that he or she is working to remedy the error. Therefore, it is important to understand and follow this rule to avoid large tax charges that eat up your self employed 401k.