Deceased Spouse 401k
What are the options for a client with a deceased spouse’s 401(k)? Deceased spouse was under 59.5 years. No distributions were taken.
Can he convert it to an IRA in her name? And thereby treat it as his own without re-titiling it – preserving all the same options a deceased spouse’s IRA would have for him?
Permalink Submitted by Alan - IRA critic on Mon, 2014-01-27 19:50
Surviving spouse has several options. He could leave the 401k in place and take distributions as beneficiary, he could roll it over to an inherited IRA, roll to an owned IRA, or convert to a Roth IRA. For accounts in which he is the beneficiary rather than owner, all distributions will be penalty free. If rolled to his own IRA, distributions will be subject to penalty until he is 59.5. RMDs as beneficiary do not begin until deceased spouse would have reached 70.5 if he is sole beneficiary. Best choice depends on what client’s age is.
Permalink Submitted by Bob Modesti on Mon, 2014-01-27 22:39
The client is age 40 with a 10 y.o. son. He is the sole beneficiary. Am I correct in assuming that as an inherited IRA the account would be subject to RMDs? If this account was already an IRA as opposed to a 401(k) he could treat the spousal IRA as his own. Is there a way to transfer the 401(k) to an IRA in the deceased spouse’s name allowing similar treatment?
Permalink Submitted by Alan - IRA critic on Mon, 2014-01-27 23:59
Eventually, the 401k or IRA would be subject to RMDs, but not until the decedent would have reached 70.5. He will be 51 then but still 8.5 years short of when distributions from his own IRA would be penalty free. Since that is 2 decades from now, he should keep the account in inherited form either where it is or do a direct rollover into an inherited IRA. The inherited IRA would have to include both his name and the decedent in the title, and again all distributions would be penalty free should he need to take distributions. Even when RMDs must begin in 11 years, they will be quite small. He can roll this over to his own IRA anytime, but should not do so unless he is sure he will not need to take any distributions before age 59.5.
Permalink Submitted by Bob Modesti on Wed, 2014-01-29 00:38
Would the standard format of titling an inherited IRA be used, and/or does spouse or spousal need to be indicated (where) when setting up the new IRA?Mary Smith (deceased); IRA FBO John SmithThank you
Permalink Submitted by Alan - IRA critic on Wed, 2014-01-29 01:52
Yes, an inherited IRA must include the names of the decedent and the beneficiary in the order preferred by the IRA custodian. It might take a little effort to find an IRA custodian willing to establish an inherited IRA for a spousal beneficiary instead of an owned IRA for the sruviving spouse, which is their usual practice. The IRS Regs do not clearly state this can be done, but it was approved by the IRS in PLR 2004-50057. Most custodians will do it, but you might encounter one that will resist. But in this case the surviving spouse should maintain the account in inherited form to protect him or her from paying an early distribution penalty for any distributions taken prior to age 59.5.