Tax on Solo 401k Early Distributions
If a distribution is made to an employee (participant) under the Solo 401k plan before he or she reaches age 59½, the participant may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the participant must include in income.
Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances.
Reporting the tax. To report the tax on Solo 401k early distributions, file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. See the form instructions for additional information regarding this tax.
It is recommended to always check with your Solo 401k provider before commencing Solo 401k distributions, whether partial or full, in order to determine if the law permits distributions and that proper tax reporting is processed.
Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances.
- Made to a beneficiary (or to the estate of the participant) on or after the death of the participant.
- Made due to the participant having a qualifying disability.
- Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
- Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
- Made to an alternate payee under a QDRO.
- Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions).
- Timely made to reduce excess contributions under a Solo 401k plan.
- Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
- Timely made to reduce excess elective deferrals.
- Made because of an IRS levy on the Solo 401k plan.
- Made as a qualified reservist distribution.
- Made as a permissible withdrawal from an EACA.
Reporting the tax. To report the tax on Solo 401k early distributions, file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. See the form instructions for additional information regarding this tax.
It is recommended to always check with your Solo 401k provider before commencing Solo 401k distributions, whether partial or full, in order to determine if the law permits distributions and that proper tax reporting is processed.