With the exception of the spouse beneficiary rules, the SECURE Act did away with the “stretch” provision for most non-spouse beneficiaries. Prior to the passage of the SECURE Act non-spouse beneficiaries could stretch payments from their inherited solo 401k over their life expectancy. However, under the new rules most non-spouse beneficiaries are required to fully distribute their inherited solo 401k funds over a 10 year period and are non longer able to take life expectancy payments unless they are eligible Designated beneficiary (EDBs).
Eligible Designated Beneficiary (EDB)
EDBs are designated beneficiaries who are:
- The surviving spouse of the solo 401k plan participant;
- A minor child (under age 21) of the solo 401k participant;
- A disabled individual [as defined under Code 72(m((7)];
- A chronically ill individual;
- A person not more than 10 years younger (based on birthdates of the deceased solo 401k participant and the beneficiary) than the solo 401k plan participant; or
- A designated beneficiary of the solo 401k plan participant who died before the SECURE Act effective date of January 1, 2020.
Whether or not a designated beneficiary is an EDB is determined as of the date of the sol0 401k plan participant’s death.
Non-Eligible Designated Beneficiary (NEDB)
You’re a non-eligible beneficiary if you don’t meet the above criteria; as a result, the solo 401k will need to be transferred to a beneficiary IRA and the IRA will need to be fully distributed within 10 years after the solo 401k plan participant’s death. The 10-year deadline is December 31 of the 10th year.
Death of the Solo 401k Plan Participant After RMDs Commenced: If the solo 401k participant died after his or her required minimum distribution date (age 73), then the NEDB is required to make distributions from the beneficiary IRA years 1-9 following the year of the solo 401k participant’s death and to fully distribute the beneficiary IRA by the end of the 10th year.
ILLUSTRATION 1:
Fred passed away in 2026 at age 76. His son Jason is the named primary beneficiary of his solo 401k as Fred’s wife had waived being the named the primary beneficiary. Jason is 42. Because Fred deceased after his required minimum distribution date, his son Jason will first have to transfer the solo 401k to a beneficiary IRA for the benefit of Jason and then start to take RMDs from the inherited beneficiary IRA based on Jason’s life expectancy. Jason will have to take RMDs years 1-9 and ultimately fully distribute the beneficiary IRA remaining balance by December 31, 2036.
Death of the Solo 401k Plan Participant Before RMDs Commenced: The rules are different and more favorable to the beneficiary of the solo 401k when the solo 401k plan participant deceases prior to the required minimum distribution date. While the inherited solo 401k funds will still need to be transferred to a beneficiary IRA since a solo 401k is only for the self-employed and non-spouse inherited solo 401k funds cannot be transferred to the beneficiary’s own or existing solo 401k, the beneficiary IRA can be distributed in the 10th year and no distributions are required in years 1 through 9. The beneficiary can take as little or as much as he wants during years 1-9 — as long as the entire account balance is distributed by the end of the 10-year term.
ILLUSTRATION 2:
Sally died in 2026 at age 66 and had named her daughter Jennifer as the primary beneficiary of her solo 401k with the approval of Sally’s husband who had formally opted out of being the primary beneficiary by formally signing the beneficiary election form while Sally was alive. Jennifer is not subject to the 10-year rule and does not have to take annual RMDs but must receive the entire inherited IRA by December 31, 2036.
Roth Solo 401k Note: in the case of an inherited Roth solo 401k, there are no RMDs under the 10-year rule. Therefore, the non-spouse beneficiary of the Roth Solo 401k is still required to transfer the solo 401k to beneficiary Roth IRA but can wait to take a full distribution of the Roth IRA by the end of the 10th year, and may also take distributions in years 1-9 but is not required to do so.
ILLUSTRATION 3:
Jack is the primary beneficiary of his mother Mandy’s Roth solo 401k. Mandy died in 2026 at age 82. Mandy is deemed to have died prior to her required minimum distribution beginning date because Roth solo 401k funds just like Roth IRAs are not subject to RMDs during the solo 401k plan participants live. As a result, Jack will still have to transfer the inherited Roth solo 401k to a beneficiary Roth IRA but won’t have to take distributions from the beneficiary Roth IRA until December 31, 2036 (year 10).
Does the 10% Early Distribution Penalty Apply QUESTION
