Beneficiary 401k rollover to TIRA
I have inherited a non spousal 401k. The 401k consisted of both before tax and after tax money. The 401k management company says that its best to rollover the before tax money to a TIRA and take a distribution of the after tax money. RMD’s had already started in a previous year. My question is can the after tax distribution count as or towards this years RMD? Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2013-09-03 01:29
Yes, distributions count toward RMD requirements regardless of their pre or post tax status. Note that you have the option to transfer all or part of the inherited 401k to an inherited Roth IRA (taxable rollover) as well as an inherited TIRA. But you have to complete the year of death RMD if decedent did not complete it and also your own RMD for the following year if you get into the following year before doing the transfer. I assume that the after tax money you inherited were form the pre tax account and you did NOT inherit any balance in a designated Roth account.
Permalink Submitted by Steve Ragla on Tue, 2013-09-03 01:39
The RMD was taken for the year of death. I agree that there should be an option for the after tax money but, the 401k management company has not given me this option. To clarify can I use the after tax money to cover the entire RMD for this year? There were no other accounts beside the 401k. Thank you.
Permalink Submitted by Alan - IRA critic on Tue, 2013-09-03 02:10
Any value that shows in Box 1 of the 1099R for distributions PAID TO YOU counts toward your RMD regardless of the taxable amount in Box 2a. You would receive one 1099R for distributions paid to you and another for direct rollovers to an inherited IRA. The problem is that you do not know if the plan will just pro rate all distributions between pre tax and post tax or allow you to take out the after tax amounts first. This can depend on the provisions of the plan and the accounting that reflects those provision. If they will fill out the direct rollover portion (G coded 1099R) accordingly, you could have the after tax amount rolled to an inherited Roth IRA and the pre tax amount transferred to an inherited TIRA. There would be no taxes due on such a 1099R. But you have to take care of the RMD first, and if pro rating is not required for the RMD 1099R, then it should not be required either for the direct rollover of what is left. I know this gets confusing, but you need to first decide what you would rather do with the after tax amount, either use it to reduce taxes on your RMD OR roll it to an inherited Roth IRA. Then see if the plan can accomodate your preferences.
Permalink Submitted by Steve Ragla on Tue, 2013-09-03 02:26
Thank you so much for the information. I will make another call to the 401k administrator tomorrow.