5-Year Rule Distribution for Inherited IRA with the estate as the beneficiary
I have a particular situation in which my client is an heir to an estate that included 401k assets. The deceased 401(k) owner designated her estate as the beneficiary. She died BEFORE the required beginning date and my research indicates that the 5-year rule could be applied to the distribution. My question is what is the best manner to execute this transaction in order to spread out the taxes over a 5 year period?
The client’s CPA has suggested that the only way to do this is to have the 401(K) plan administrator distribute the plan assets in equal payments over a 5-year period. Is this correct?
Permalink Submitted by Alan - IRA critic on Mon, 2014-07-28 20:17
The 5 year rule does indeed apply, but because the 5 year period ends at the end of the 5th year after the year of death, there is a good chance the distributions could occur in 6 different calendar years including the year of death, possible even 7 years if the estate adopted a fiscal tax year. Since the value of the 401k will be changing due to the investments, once the number of tax years is known the most equal distributions would be determined by dividing the current balance by the number of years for the first year (eg 6 years – divide by 6, for the second year divide by 5, then 4 etc. While the distributions may not be exactly equal due to investment changes, this is as close to equal distributions as you can get.
Permalink Submitted by Bruce Steiner on Mon, 2014-07-28 21:46
If you’re taking the estate administration expenses as income tax deductions rather than as estate tax deductions (which is more common now that fewer estates are subject to estate tax), the estate may not want to take distributions evenly, since its administration expense deductions may be uneven. You might ask the lawyer handling the estate how best to handle this.