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Investor Insights Blog|Solo 401(k) Beneficiaries: What You Need To Know

Managing Your Account

Solo 401(k) Beneficiaries: What You Need To Know

For most business owners, it is important to pass down a legacy as well as to make sure the ones you love are taken care of in the event of your passing. One of the most common ways to do this is naming beneficiaries for your retirement accounts. For retirement accounts like a Solo 401(k), naming a beneficiary is especially important. Without a named beneficiary, the account may not be distributed according to your wishes.

To prevent that (as well as other unfavorable situations), read below to find out more about designating beneficiaries for your Solo 401(k).

What is a Solo 401(k)?

The Solo 401(k) (also known as Individual 401(k), Self-Employed 401(k), and Solo(k)), is designed for businesses that employ only the owner and their spouse. It can be established by both incorporated and unincorporated businesses including sole proprietorships, partnerships, and corporations. It is often appealing to business owners because it has larger contribution limits than an IRA.

For a more in-depth look into self-directed Solo 401(k)s, check out this video:

Designating beneficiaries for a Solo 401(k): how it works

When you open a Solo 401(k) or other retirement account, you can designate primary and contingent beneficiaries by filling out and submitting a beneficiary designation form. The process of choosing beneficiaries can vary slightly depending on your situation and financial goals.

Your primary beneficiary is your first choice of who receives your assets upon your death. If you are married, federal law automatically assigns your spouse as your primary beneficiary. You will need to obtain spousal consent to name someone else as your primary beneficiary.

If your primary beneficiary doesn’t survive you or declines to receive your assets, then your contingent beneficiaries are next in line to receive your assets. You can name multiple beneficiaries (primary and contingent) with your Solo 401(k). If you have multiple beneficiaries, you’ll need to make sure to specify the percentage that each beneficiary will receive.

It’s a good idea to review beneficiaries on an annual basis to make sure the intended beneficiaries are named. This is best practice in case a life changing event occurs (marriage, divorce, birth or adoption of a child, death, etc.) and you need to make a change. If you have a Solo 401(k) account through Equity Trust and you need to change your primary and/or contingent beneficiaries for any reason, you are able to fill out another beneficiary designation form and submit it through your myEQUITY account.

New rules for beneficiaries taking distributions

The implementation of the SECURE Act (effective January 1, 2020) altered beneficiary rules. Depending on whom or what you designate as a beneficiary for your account, there are now different distribution requirements.

The SECURE Act recognizes three different groups of beneficiaries:
1. Eligible Designated Beneficiaries – An individual(s) who meet certain requirements
2. Designated Beneficiaries – An individual(s)
3. Non-Designated Beneficiaries – Nonperson entity (such as an estate, trust, or charity)

Here are the distribution guidelines for each group of beneficiaries:

Eligible Designated Beneficiary

As defined by the IRS: “An eligible designated beneficiary includes a surviving spouse, a disabled individual, a chronically ill individual, a minor child, or an individual who is not more than 10 years younger than the account owner. Certain trusts created for the exclusive benefit of disabled or chronically ill beneficiaries are included. These eligible designated beneficiaries may take their distributions over the beneficiary’s life expectancy. However, minor children must still take remaining distributions within 10 years of reaching age 18. Additionally, a surviving spouse beneficiary my delay commencement of distributions until the later of the end of the year that the employee or IRA owner would have attained age 72, or the surviving spouse’s required beginning date.”

Designated Beneficiary

As defined by the IRS: “Designated beneficiaries, who are not an eligible designated beneficiary, must withdraw the entire account by the 10th calendar year following the year of the employee or IRA owner’s post-2019 death.”

Non-Designated Beneficiary

As defined by the IRS: “Non-designated beneficiaries must withdraw the entire account within 5 years of the employee or IRA owner’s death if distributions have not begun prior to death.”

When you educate yourself on beneficiaries and designate them for your Solo 401(k) or other retirement accounts, you ensure a smooth transition of your assets. You make sure that the ones you love aren’t faced with difficulties such as probate and/or the delay of asset distribution.

1

Can I roll over a 401(k) account into a self-directed IRA?

Yes. A self-directed IRA gives you the ability to diversify your portfolio with additional investments that are permitted by the IRS, in a tax-free or tax-deferred environment.

2

When I roll over funds from an employer-sponsored or qualified retirement plan, do they need to go directly into a traditional IRA?

No. Per IRS guidelines, rollovers from a qualified plan can be rolled over into a traditional or Roth IRA. If the rollover is made directly to the Roth IRA, the transferred amount is subject to income taxation but avoids the 10-percent early distribution penalty. You should consult with your plan administrator regarding the permissible withdrawal options allowed under the tax-qualified plan.


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