transferring 401k to beneficiary IRA rules
I have a new client whose 46 year old spouse died in May of 2006. The client never transferred her spouse’s 401K balance and is now being told by the husband’s company that she needs to move his 401K balance. Here’s my question. My client (age 47) wants to transfer her husband’s old 401K into a beneficiary IRA but I understand that there is a 5 year limitation that could come into play since she was suppose to transfer the money before Dec 31 of the fifth year after her spouse’s death. What are her options now that she is past the 5 year window? What are the implications of transferring the 401K balance into a beneficiary IRA even though she’s past the five year window?
Thanks
Permalink Submitted by Alan Spross on Mon, 2012-03-19 20:07
Client can ignore the 5 year period here.
Since the client was a sole spouse beneficiary, there is no RMD required until the husband would have reached 70.5. In this situation she should transfer the funds into a beneficiary IRA from which there are no RMDs, but if she needs to take distributions to pay expenses, she can do so without any 10% penalty.
The transfer to a spousal inherited IRA was validated by PLR 2004 50057. Sometimes it takes some searching to find an IRA custodian who will open an inherited IRA account, but most are willing to do so. When she reaches 59.5 she may want to roll the inherited IRA over to her own IRA, but until then it should remain in inherited form unless she is TOTALLY sure she will not need funds before 59.5. As long as the funds remain in the inherited IRA, she will have no RMDs until the year her husband would have reached 70.5.
She should find out if any portion of the plan is from after tax contributions, because such funds would become basis in the inherited IRA. She also needs to name a successor beneficiary ASAP.