Inherited 401k & Roth IRA (Spouse)

Submitted by Vivek Chaturvedi on Sat, 2016-04-16 21:25

Outlined below is our plan(s) and questions regarding the passing of a parent. Thank you in advance for your input.

Parent #1 (will be 66 this summer)

Parent #2 (would have been 69 this summer) – Passed away recently

Parent #1 Inherited:
1) 401k (via TIAA-CREF)
2) 401k (via TSP – Federal Government 401k program)
3) Roth IRA (via TIAA)

Our Plans for Parent #1
1) & 2) For the 401k accounts we are considering rolling the funds to a Traditional IRA to extend the tax free growth to when Parent #1 turns 70.5.
–Is this the correct strategy?
–Neither Parent held a T-IRA, so we will be opening a new T-IRA with a mutual fund company and explain we do not want any funds contributed as we will be rolling over said 401k funds soon. Does this sound correct?
–Once in the Traditional IRA, we assume we can choose how to allocate the money (among the funds available in whatever mutual fund company we choose to use)?
–What other downsides are we missing here? –

3) Parent #1 will choose “maintain the account as the original owner and the account becomes my IRA account” versus “continuing to be the beneficiary under the spouse’s original contract”
–This is the language used on the TIAA Roth IRA form
–Inheriting the Roth IRA appears to be more straightforward given no RMDs and that Parent #1 is older than 59 (66).
–Is there anything we are missing here? –Are there penalties or tax implications we are missing?



Submitted by Alan - IRA critic on Sun, 2016-04-17 00:25

  • Yes, the spousal rollover should be done right away given these ages. RMDs will be delayed around 4 years. The 401k  funds should be transferred to the IRA by direct rollover to avoid withholding. The IRA custodian can probably handle much of the paperwork for this direct rollover. The surviving parent will have complete control of investment options for the IRA, only limited to what the mutual fund company will support. A large broker or discount broker would probably offer a wider choice of investments however, and perhaps lower fees.
  • The Roth IRA will be completely qualified and tax free if Parent 2 made the first Roth contribution prior to 2012. There will be no RMDs for the Roth IRA.
  • Both IRAs should be titled just showing Parent 1 as owner with no mention of Parent 2. Parent 1 should name their own beneficiaries on these IRAs ASAP and also on the 401ks prior to the rollover.
  • Check to determine if any of the 401k balance is in the Roth 401k option, and also if there is any after tax money in the 401k plans in the non Roth account. If so, then a split direct rollover should be ordered. Check this out before requesting any direct rollovers.


Submitted by Vivek Chaturvedi on Sun, 2016-04-17 15:41

Thank you for the response.Yes initial roth contribution was prior to 2012.We also found that we can rollover as a lump sum Parent #2 Death Benefit toward an IRA also.  We are assuming that rolling over Death Benefit award and/or 401ks does NOT impact the basis for form 8606 purposes?



Submitted by Alan - IRA critic on Sun, 2016-04-17 17:11

Where is the basis you are referring to?  If there is basis in a 401k from after tax contributions, it can be rolled over to a TIRA, but that makes no sense when it can be isolated and rolled to a Roth IRA. Roth IRAs have basis from both regular contributions and conversions, but that is immaterial in this case since the Roth is fully qualified now.  To answer your question, would need to know which plan has basis in it. If parent 2 has basis in a TIRA, that amount will not change, but the % of that basis will drop due to the rollover of pre tax dollars from the 401k or TSP.



Submitted by Vivek Chaturvedi on Sun, 2016-04-17 17:38

1. Parent #2 does not have any TIRA2. We do not believe any 401k with Parent #2 was Roth3. Then, if for instance we rolled $100 from 401k, $100 from TSP, & $100 from Death Benefit into a new T-IRA (as neither parent has a T-IRA open), does this change the basis (or is it immaterial as these are rollovers) and would for 8606 be needed for next year’s tax return?  I think the answer to this is NO CHANGE IN BASIS and NO NEED FOR 8606. Sorry, I am probably not asking the question properly. Thank you for your time and patience with the questions.



Submitted by Alan - IRA critic on Sun, 2016-04-17 20:47

You are right. There is no TIRA basis if all the 401k and death benefit funds are pre tax. Therefore, no need to file Form 8606.



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