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Solo 401k for Spouses: Do We Need to Keep Solo 401(k) Accounts Separate for Married Couples?
Many married couples wonder if they should combine their solo 401(k) accounts into one account or keep them separate.
The short answer is yes separate solo 401k sub-accounts for the benefit of each spouse are needed and there are several good reasons why:
Tracking Contributions
With separate accounts, it is easier to track who has contributed what amount. This is important for a few reasons:
- There are annual limits on how much can be contributed to 401(k) accounts. Keeping accounts separate makes it clearer if you are reaching the limit for each individual.
- Some 401(k) contributions like employer matches may differ between spouses. Separate accounts simplify tracking these differences.
- In the case of the death of one spouse, separate accounts make it more straightforward to determine each spouse’s share of assets.
Different Beneficiaries
Spouses may want to designate different beneficiaries (children, siblings, etc) to receive their 401(k) assets. Separate accounts facilitate distinct beneficiaries for each person.
Divorce
In case of divorce, having separate solo 401k sub-accounts for each spouse delineates individual assets to be divided. Co-mingled accounts can greatly complicate the division of assets.
So in summary, while the funds can be jointly invested later, it is best to keep individual 401(k) contributions in distinct accounts when first setting them up. This avoids numerous complications down the road in case of major life events.
Example Scenario:
John and Jane have established a solo 401(k) plan for their self-employed business.
Even though there is a single plan, Jane has opened and contributed to her own separate account opened under the name and EIN of the solo 401(k) account for her benefit. John likewise has a separate account for his contributions that is opened under the name and EIN of the solo 401(k) account for his benefit
Jane makes elective salary deferrals from what she earns in the business, as well as discretionary profit-sharing contributions from the company, all directed into her account within the plan.
John receives compensation from the business which he contributes via elective 401(k) deferrals. He also receives profit-sharing deposits from the company into his own solo 401(k) account.
So while John and Jane collaborate on running their joint business, their retirement savings within the solo 401(k) framework remain entirely separate and tracked to each individual for control and flexibility purposes. This structure essentially allows each spouse their own independent account within the shared plan umbrella.
