How to Inherit a Solo 401k Retirement Account

A solo 401k is a retirement savings plan designed for self-employed individuals, allowing more tax-deferred savings than a regular IRA account. Assets in a solo 401k become part of the taxable estate when the owner dies. The beneficiary also must pay income taxes on distributions taken from the solo 401k. To mitigate the amount of taxes paid at one time, you can utilize several IRS-approved options when inheriting an IRA. Examine the options carefully, and speak with a tax adviser to ensure you are making the best financial decision for your situation.

Things You'll Need

• Death certificate
• 401k statement

Instructions

1. Call the 401k administrator to confirm the names of the rightful beneficiaries on the 401k. In many states, the surviving spouse inherits the assets automatically unless a signed wavier is provided. A 401k participant can name anyone, including a trust or charity, as the beneficiary.

2. Obtain the death benefits form, sometimes called a beneficiary claim form. If you are not the designated beneficiary, the 401k plan administrator may not send it to you and will send it only to the designated beneficiary.

3. Review your existing financial situation, including the estate assets you are inheriting. Some beneficiaries realize the assets are needed for funeral costs or to close out the estate, while others have no immediate need for the money and want to reduce income taxes. Your tax adviser can help evaluate different scenarios.

4. Complete the beneficiary claim form. A surviving spouse can elect a lump sum distribution or continue the IRA as her own. A non-spouse beneficiary may not continue the IRA as her own, but does have three options: accept a lump sum distribution, accept distributions over five years, or roll the 401k into a beneficiary IRA. Some administrators do not allow all IRS-approved options, so read the paperwork or ask the administrator questions.

5. Sign and submit the forms to the 401k administrator. Include a death certificate and account statement copy.

Tips & Warnings

• If you are rolling over the 401k into a beneficiary IRA, open a beneficiary IRA at a bank or brokerage firm before completing the beneficiary paperwork. Use the account information of the new custodian to complete the section for the rollover. This expedites a direct rollover and eliminates some tax issues.

• Failure to elect the beneficiary IRA or the five-year distribution automatically designates the 401k as a life-expectancy plan for the surviving spouse and as a five-year distribution plan for non-spousal beneficiaries.

• Before a beneficiary rolls over the assets, a required minimum distribution is required if the deceased was over the age of 70.5 in the year of death. The distribution must be taken before December 31 in the year following the death.

• Add the entire 401k value to the estate for transfer tax issues. Add any distributions to your annual gross income on Line 15, Form 1040.

References

• IRS: Publication 590 IRAs (What if you inherit an IRA)
• 401k Help Center: What You Need to Know When You Inherit a 401k
• 401k Help Center: Tax Issues When You Inherit a 401k