Inherited 401K nonspousal options and clarification?

Submitted by Jason Scott on Sat, 2016-07-16 05:11

My father passed in April 2016 and my sister and I are the designated beneficiaries on the traditional 401K and there was no spouse. While over 70, he was still working full time and it appears the plan allowed him to waive the RMD requirement. Any guidance you can provide would be extremely helpful.

Since he was still employed and working full time in 2016, would we be required to take his RMD this year? I am guessing not since the plan waived the requirement, but I wanted to make sure. If we are required to take his RMD, is the RMD the same regardless of whether the account is split before the end of the year? I wasn’t sure if we split the account this year, well before the deadline of 12/2017, if we would both then be required to take his full RMD out of our half.

Due to the value of the 401K, there is some consideration being given to conversion to a inherited Roth IRA for one or both parties since there is the possibility of being in top tax backets in Medicare age due to RMDs. From a previous answer, we are able to convert some or all to a Inherited Roth IRA. It also appears then we would be required to take RMDs from both inherited IRAs from an article on this site.

At what point in the process must the inherited Roth come about? I am wondering if it is possible to create partial inherited Roth IRAs over multiple years to take advantage of maxing the lower tax brackets similar to some of the strategies utilized in Roth IRA conversions without losing the benefit of stretching RMDs over the heirs life expectancy. Depending on restrictions, I can see this either being limited to a one time trustee to trustee transfer which must be done for the full account value. I can also see this only being allowed for this year and the next due to the requirement to create the inherited IRA by the end of 2017, the year after his death. Is there another window I am missing? It sounds like once it is transferred to the inherited IRA it is locked and can’t be changed which would mean a two year max to do conversions assuming there is not a 100% transfer requirement.



Submitted by Alan - IRA critic on Sat, 2016-07-16 23:21

  • Since he passed prior to his required beginning date, there is no year of death RMD. Therefore, if you do a direct rollover prior to the end of this year to an inherited IRA or inherited Roth IRA, the plan should not remove any RMD from the rollover amount.
  • While you may be able to split your direct rollovers between inherited IRA and inherited Roth, the plan is not REQUIRED to provide more than one direct rollover, so you would have to determine if this plan allows either of you to split it. RMDs would be required from either type of inherited IRA. Being able to further spread these direct rollovers over a period of years is quite unlikely, but again you could ask the plan administrator if this is possible but I would bet on the 100% lump sum transfer. Qualified plans are notoriously anxious to get death benefits distributed to beneficiaries ASAP.
  • You could elect a direct rollover to the inherited Roth, and then recharacterize all or part of that to an inherited TIRA per Notice 2007, Q 7. This would be a solution if the plan only allowed a direct rollover to a single inherited IRA type. It also might be useful if your Roth rollover suffered investment losses shortly after the rollover.

Submitted by Jason Scott on Sun, 2016-07-17 21:59

Thanks for the help.

  • Based off the wording below which is from the non-spouse benefit claim form I finally found online, it sounds like you could opt for the 5 year option and then over the 5 years do distributions to inherited IRAs which would potentially allow you to break up the conversions to Inherited Roth IRAs. The catch being of course the account has to be fully distributed by December 31st, 2021, with his death in 2016. Is this actually possible or is the wording tripping me up? I haven’t seen mention of this before which is why I think their wording might be tripping me up.
  • Once in the inherited IRA, they would still follow my life expectancy though I am assuming?

 5. Determining How and When Payment must be made to Certain Beneficiaries:

a. Individual Beneficiary –If you are an individual, such as the participant’s child, you may elect either the “five-year rule” or the life expectancy rule.”  Under the “five-year rule,” no amount is required to be distributed until the fifth calendar year following the year of the participant’s death, at which point the entire amount to which you are entitled must be distributed.  Any distributions made prior to January 1st of the fifth year following the year in which the participant died may be directly rolled to an IRA established on behalf of yourself as a designated beneficiary, treated as an inherited IRA.  Thereafter, no distribution amount may be directly rolled into such an IRA.  Under the “life expectancy rule,” required minimum distributions for years after the participant’s death are generally based on a distribution period that can be determined using your single life expectancy. This rule applies whether or not the death occurred before  the  participant’s  required  beginning  date  (i.e.,  the  later  of  age  701/2  or  retirement).  The distribution period is based on the beneficiary’s age (as of his or her birthday in the year following the year of the participant’s death), reduced by one for each elapsed year since the year following the participant’s death.

  

Submitted by Alan - IRA critic on Mon, 2016-07-18 03:16

This is possible once the beneficiary has either elected the 5 year rule or the plan in certain cases might require it. If a full distribution is requested prior to the end of the year following the year of death, the beneficiary is able to opt out of the 5 year rule and use life expectancy with respect to the inherited IRA. Otherwise, you are correct that distributions directly from the plan under the 5 year rule are eligible for rollover (per Notice 2007-7) and are not considered RMDs until the final year under the 5 year rule. Therefore, as long as the plan does not require an LSD, the beneficiary should be able to do direct rollovers to an inherited Roth over the first 4 years of the 5 year rule period.

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