A Solo 401(k) is a fantastic retirement plan for self-employed individuals. With high contribution limits, both tax-deferred and Roth savings, and full control over investment choices, it provides one of the best ways to prepare for your golden years.
There are several roles related to ownership, control, and inheritance that figure into the Solo 401(k) plan. Understanding how various people interact with the 401(k) can help insure you have your plan setup properly.
A Solo 401(k) is a specialized form of trust. Following are the different roles associated with the Solo 401(k) trust:
Let us take a look at how the above roles fit together.
The plan sponsor is the employer that establishes the Solo 401(k) as an employee benefit. With the Solo 401(k), you must have an owner-only business in order to sponsor the plan.
It is possible to have more than one employer sponsor a plan. If you or your spouse have more than one business that qualifies, additional businesses can join the plan as a participating employer. Compensating from all participating employers can be used to make plan contributions.
Owner – Plan Participant
A Solo 401(k) does not technically have an “owner”, but that is the best way to describe the plan participants who hold savings accounts within the plan.
Compensated owner/employees of the business that sponsors the plan can be plan participants. The spouse of an owner can also be a participant if they have compensation income from the business.
The employer that sponsors the Solo 401(k) is the plan administrator. This means that a representative of the business – i.e. you – has the authority and responsibility to administer the plan.
The primary act of the administrator is to designate the plan trustee. With the Solo 401(k), you as the business owner typically hold both roles.
The functional role of the administrator is managing the recordkeeping and reporting activities of the plan.
This involves determining who is eligible to participate in the plan and documenting plan contributions and distributions. Tracking the value of individual participant accounts within the plan and filing any plan associated forms or returns are also handled by the plan administrator.
The key role in a Solo 401(k) plan is that of the trustee. A trustee is a person who has authority to operate the plan.
The self-employed person whose business is sponsoring the plan normally acts as trustee. That means they can operate the entity to make investment choices, signing contracts, issuing funds from the plan checking account, and so forth. You can even hire a professional like a financial advisor to help you make investment decisions if you like.
Some individuals will choose to operate their Solo 401(k) plan themselves, but this is not always the case. That is where a secondary authority can come into play.
A 401(k) trust can have a co-trustee.
While we refer to this person as secondary, the authority they wield is equal to the primary trustee. Any single trustee can execute contracts, manage the plan bank account, and otherwise control the 401(k) trust.
There are a few cases where a co-trustee can be necessary or beneficial.
A business can have more than one owner, in which case all owners would probably want to be trustees.
Sometimes one person has the retirement savings, but their spouse is the one with the expertise and/or time to put the money to work in investments like real estate, private equity, cryptocurrency, or other alternative assets.
While it can be helpful in many cases to have a co-trustee, we recommend against just naming your spouse in this role because they are your partner. You should only name a secondary authority if that person will actively be involved in helping manage the 401(k). The reason is that while the 401(k) plan documents state that the signature of a single trustee is sufficient to enter into a contract, some plan counterparties will ignore that and want both signatures. This is especially common with real estate title attorneys or companies.
What happens if there is no trustee capable of managing the plan in the event of incapacitation or death?
The solution is to name a successor trustee. This person is designated in advance to take control of the plan if there is no manager or trustee available.
Safeguard plans include a successor trustee designation resolution that can be used to name such a successor. If the managing role is vacant due to death or incapacitation, that person can step into the role of manager or trustee.
When you first setup your Solo 401(k) plan you can name one or more primary and/or contingent beneficiaries who will inherit your plan account(s). Those beneficiaries can be individuals, trusts, or other non-persons like a church or school. You can also update your 401(k) beneficiaries at any time simply by completing a new beneficiary designation form.
It is important to understand that control and inheritance are two entirely separate concepts.
Many people want to name their spouse a successor trustee because they think that is necessary for their spouse to inherit the 401(k). That simply is not the case. Trustee roles are strictly about the administration of the entity.
Options Are a Good Thing
We hope the outline we have presented here helps you better understand the different ways you can setup a Solo 401(k) to achieve your specific goals.
If you want assistance managing the plan and its investments? Appoint a co-trustee.
Do you want to ensure a qualified person will administer the wind-down of the plan and distribution of plan assets to beneficiaries after you pass? Appoint a successor trustee.
And if your situation changes, you have the authority to make adjustments as needed.