401k participant dies

There is a special rule for nonspouse “rollovers” in the situation you describe but it doesn’t work for a surviving spouse. IRS has issued private rulings allowing this but currently the law does not.

You need to investigate to see if there are other options from the 401k plan administrator. Often plans are more flexible for a surviving spouse than they wuold be for a nonspouse beneficiary.

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That PLR was 2004 50057. No explanation why Congress has overlooked this issue. Perhaps it is not eligible for inclusion in a technical correction bill since no original legislation directly addressed the spousal transfer. They may also have incorrectly assumed nothing was necessary since the spouse already had their own rollover.

It still might be advisable to check with the plan to see what distribution options they offer a surviving spouse, with present and future potential for NUA tax benefits kept in mind. If there are none of either of the above, there should be little risk in pursuing the inherited IRA transfer.

kylee is correct in suggesting to keep options open by starting with an inherited IRA, and the other statements are also correct. There will be no inherited IRA RMDs required until the deceased spouse would have reached 70.5, and the successor beneficiaries will still get the stretch prior to the first RMD year. With a rollover to survivors own IRA, a the surviving spouse that comes up short on cash flow needs prior to age 59.5 is forced into a 72t plan in order to eliminate early withdrawal. Since these plans are subject to heavy retroactive penalties and interest if they are modified, they should be viewed as a last resort.

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Alfry, I believe he means that the surviving spouse inherited IRA does not have RMD requirements until the deceased spouse would have been age 70 1/2. So it is the best of both parts, the surviving spouse can voluntarily take distributions prior to their age 59 1/2 without the 10% early withdrawal and the surviving spouse is not required to take any distributions from the inherited IRA until the deceased spouse would have been required to take their own RMD’s had they lived.

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Al, part b:

This is tied in with the infamous “surviving spouse of a surviving spouse” provision in the IRS Regs 1.401(a)9-3. Here is the copied Q&A 5:

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Q–5. If the employee’s surviving spouse is the employee’s sole designated beneficiary and such spouse dies after the employee, but before distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), how is the employee’s interest to be distributed?

A–5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving spouse is the employee’s sole designated beneficiary and dies after the employee, but before distributions to such spouse have begun under section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section 401(a)(9)(B)(ii) and the life expectancy rule in section 401(a)(9)(B)(iii) are to be applied as if the surviving spouse were the employee. In applying this rule, the date of death of the surviving spouse shall be substituted for the date of death of the employee. However, in such case, the rules in section 401(a)(9)(B)(iv) are not available to the surviving spouse of the deceased employee’s surviving spouse.

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Note:
1) This has nothing to do with the spousal rollover
2) If survivor dies prior to survivor’s RMD as a beneficiary (in some cases deferred until decedent would have reached 70.5), the surviving spouse is treated as the employee (aka IRA owner). This would mean that the successor beneficiaries would be treated as designated beneficiaries for RMD purposes including getting their own stretch.
3) This benefits is lost as of the first RMD year as a beneficiary, so the rollover needs to be done prior to that if the full successor beneficiary stretch is desired. The survivor’s own stretch is also adversely affected if the rollover is not done by then also.
4) If the surviving spouse remarries, the new spouse is not eligible to be treated as the employee, and their beneficiaries would not get the full stretch, but would have to continue the decedent’s RMD schedule. For these spouses, the rollover becomes more compelling.

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