After the solo 401k owner/participant dies, required minimum distributions must continue. If not done, the beneficiary could face penalties and taxes.
Understanding the Required Beginning Date
Because a solo 401k plan is considered an employer-sponsored retirement plan, the solo 401k participant is required to start taking annual distributions—required minimum distributions (RMDs)—in the year that he or she turns age 70½. An RMD is the minimum amount that an account owner must receive from a retirement plan such as a solo 401k plan each year. If you have multiple 401k plans (e.g., a solo 401k plan and a 401k with a current or former employer), the IRS rules require separate RMDs calculated and distributed from each plan NOT just one plan. Also, the IRS rules IRS requires that RMDs calculated separately from each IRA and solo 401k plan as well as distributed from each account.
Prior: When the solo 401k owner/participant dies before age 70 1/2 (the required beginning date for RMDs), a year of death distribution DOES NOT apply so the beneficiary is not required to make a distribution from the solo 401k plan in the year of death.
After: However, If the solo 401k owner/participant reached age 70 1/2 prior to her death and did not take the RMD before her death, the solo 401k beneficiary will be required to take the RMD by December 31 of the year of death.
In some cases the solo 41k owner/participant may have named multiple beneficiaries, which means each beneficiary is required to take part of the RMD amount. The beneficiary election form will need to be reviewed to determine each beneficiaries share. Even if willing, the rules do not permit one beneficiary to take the full RMD amount.
Form 1099-R Reporting
The RMD is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as a death distribution under each beneficiary’s name and Social Security number, entering code 4, Death, in Box 7.
50 Percent Penalty for Missed RMDs
As previously stated, the solo 401k beneficiary(ries) takes on the onus for timely taking the yer of death RMD. If not processed timely, a 50 percent excess accumulation penalty tax applies to the amount that should have been taken by December 31 in the year of death. The IRS may waive the 50 percent penalty if the RMD was missed for a valid reason. Such waiver can be applied for by filing Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and an explanation letter must be attached.