What are the implications of taking out a distribution from the SOLO 401k to purchase a residence? Is there a limit on the distribution amount Luis can withdrawal? What is the tax and penalty? Should there be a penalty or additional tax, when are they paid? At time of distribution, or when we he files his taxes?
ANSWER:
If Luis is over age 59 1/2, he can distribute any amount from the solo 401k plan but it will be subject to federal taxes, possibly state taxes and a 10% early distribution penalty if he is under age 59 1/2. Otherwise, if he is under age 59 1/2, he may not be able to take a solo 401k distribution or may be limited to only distributing funds from the solo 401k plan that were previously transferred from IRAs or former employer plans.
To read more about the solo 401k distribution rules, VISIT HERE.
The 20% federal tax will need to be paid upfront so it will need to be deducted from the distribution and submitted to the Department of the Treasury by the 15th of the following the month in which the distribution was taken.
The first primary home exemption does not apply to solo 401k pans; it only applies to IRAs. See the following.
https://www.mysolo401k.net/first-time-home-buyer-rules-solo-401k-ira/
https://www.mysolo401k.net/self-directed-ira-first-time-home-buyer-exception/