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Beneficiary Options for a Solo 401k

If you are a beneficiary (rather than the owner) of a qualified plan, such as a Solo 401(k), and receive a distribution as a result of the owner’s death, in general you have the following options:

  • Pay ordinary income tax: If plan assets are distributed to you, then you will have to report the distribution as income on your tax return. However, if you receive a distribution from a plan you inherited, you will not have to pay an early distribution tax, even if you are younger than 591/2. The penalty is waived for inherited plans.
  • Roll over the distribution: If you inherit a qualified plan and you were the spouse of the original owner, you can roll over the distribution into a traditional or Roth IRA. However, if you inherit a retirement plan, such as a 401(k) Plan, and you were not the spouse of the original owner, then you may roll over the plan assets into a traditional IRA only if you follow certain rules. For example, you may not roll over the assets into a plan or IRA that is in your own name (you must establish a new IRA that is titled in the name of the deceased with you as the designated beneficiary).
  • Convert to a Roth IRA: A spouse that inherits a retirement plan is provided virtually all of the distribution options offered to the deceased plan participant. Beginning in 2008, non-spouse beneficiaries also have the options to transfer the assets to a Roth IRA subject to certain rules.
  • Use ten-year averaging.

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Posted in 401(k), Solo 401(k)