The Solo 401(k) exception list differs from the IRA list in important ways. Several IRA exceptions, including the first-time homebuyer exception and qualified higher education expenses, do not apply to 401(k) plans. The Solo 401(k) has its own exceptions that IRAs do not share.
The recognized exceptions are:
- Death. Distributions made to a beneficiary or estate following the account holder's death are not subject to the penalty.
- Disability. A permanent and total disability qualifies under the IRS definition in IRC Section 72(m)(7).
- Separation from service at age 55 or later. If you stop working in or after the year you turn 55, distributions from your Solo 401(k) may avoid the penalty. You must have separated from service in or after the year you reach 55; separating earlier and waiting until age 55 does not satisfy the requirement.
- Substantially Equal Periodic Payments (SEPP). A series of payments calculated under IRS-approved methods and taken at regular intervals over your life expectancy. Commonly referred to as 72(t) payments. Once started, the payment schedule must be maintained for the longer of five years or until you reach age 59½. This exception has strict compliance requirements and carries significant consequences if the schedule is broken.
- Qualified Domestic Relations Order (QDRO). Distributions made to an alternate payee (typically a former spouse) under a court-issued QDRO are exempt from the penalty.
- Unreimbursed medical expenses. The amount must exceed 7.5% of your adjusted gross income for the year.
- IRS levy. Distributions taken as a result of an IRS levy on the plan are exempt from the penalty.
- Qualified reservist distributions. Members of the military reserves called to active duty for at least 180 days may qualify.
- Birth or adoption. A per-event limit of $5,000 applies. Both parents may each take a qualifying distribution if both participate in the plan. Added by the SECURE Act.
- Terminal illness. A physician must certify that an illness or condition can reasonably be expected to result in death within 84 months of the certification date. Added by SECURE 2.0.
- Domestic abuse. Distributions up to the lesser of $10,000 (indexed for inflation) or 50% of the vested account balance are exempt for victims of domestic abuse. Added by SECURE 2.0.
- Emergency personal expense. Up to $1,000 per year may be distributed for unforeseeable or immediate personal or family emergency expenses without penalty. Added by SECURE 2.0.
- Qualified disaster distributions. Distributions up to $22,000 are available to individuals whose primary residence is in a federally declared disaster area. SECURE 2.0 made this exception permanent.
This list covers the primary exceptions. Several carry eligibility conditions, income thresholds, or dollar limits not fully detailed here. The SEPP exception in particular carries strict compliance requirements, and a misstep can retroactively trigger penalties on all prior payments in the series. Consult a qualified tax professional before relying on any exception to plan a distribution strategy.