Self Directed 401k Plan Distributions — Video

What this episode covers

Self directed 401k plan distributions aren’t the same as IRA distributions. They don’t just happen, as they require some action on our part. Download Audio Transcript: Self-directed 401(k) plan distributions, it’s a bit different than your regular IRA. How are the distribution rules different and let’s define a distribution. A distribution is a time in which you want to take money from your plan, whether it’s an IRA or a 401(k) for living expenses. To keep it simple, I’m going to assume that you’re over the age of 59 1/2, so don’t need to talk about early withdrawal penalties, but if you’re over the age of 59 1/2 and you have a 401(k) plan and you wish to take a distribution, you may be familiar with IRA rules where a custodian sends you that distribution. You take that distribution obviously as cash. You’re using it for your living expenses, et cetera. That custodian is then responsible for IRS reporting on that distribution. 401(k) plan, a self-directed 401(k) plan, is different. How is it different? Remember that with an individual solo 401(k) plan, you are your self-employed business. You most likely are the trustee of that plan, so what now happens if you wish to take a distribution from your plan while you’re still operating your plan? The plan has to prepare a 1099 similar to the IRA, but since you’re the trustee, you as a trustee and the plan is responsible. You have to record that 1099 showing that taxable income went to you as the participant. Now in doing that, it’s not something you should be scared of, and obviously if you need the cash or want the cash for living expenses, you’re certainly entitled to take out those distributions. You should always review everything related to the distributions with your tax professional. I would even highly encourage that you utilize the services of your tax professional to prepare the 1099 on behalf of the plan and for you as the participant, but keep in mind, don’t be one of those individuals that takes up the distribution and then says, “Oops, what do I do now?” Always keep in mind, you must do the recording. You must follow the 1099R and you want to be able to show that you received taxable income from your plan.

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