Young widow - Inherited 401k and Roth IRA - Ed Slott and Company, LLC

Submitted by chris erickson on Tue, 2018-03-06 18:33

Hi,
I have married clients in their 40s. Husband just passed away. Wife might need some money from husband’s 401k and Roth IRA before wife is 59.5, so to avoid the 10% penalty tax I am going to recommend that his 401k and Roth IRA be set up as an Inherited 401k and an Inherited Roth IRA.

A few questions please:

1. Confirming that neither a Spousal Inherited 401k and Inherited Roth IRA require RMDs until age 70.5. Correct?

2. If a Spousal Inherited 401k is subsequently rolled to an Inherited Rollover IRA, the RMDs for the Inherited Rollover IRA also don’t apply until age 70.5 — correct?

3. I have read that the widow cannot change the beneficiary of her Spousal Inherited 401k, but can control the beneficiaries of a Spousal Inherited IRA. Is this correct??

4. If she chooses a Spousal Inherited 401k, she also would be limited by 401k plan rules in terms of distributions allowed, etc. Correct?

5. After age 59.5, is it possible for the spouse to again roll over these inherited accounts into her own personal Rollover IRA and Roth IRA? Thinking a benefit of rolling the Inherited Roth IRA into her personal Roth IRA might eliminate RMDs that would otherwise occur at 70.5?

Thank you for your answers and please feel free to add any other comments if you feel I have missed any other material issues!

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Permalink Submitted by Alan - IRA critic on Tue, 2018-03-06 19:20

Yes, no inherited RMDs until the year husband would have reached 70.5. However, the plan administrator should be asked about the flexibility of distributions to the surviving spouse.
Correct.
No, the widow should be able to name her own successor beneficiary on either of the accounts. Otherwise, when she passes the accounts would go to her estate.
Yes, the plan is required to allow a total direct rollover, but can restrict partial distributions.
Generally, the surviving spouse should roll over both inherited accounts at 59.5 into owned IRAs. She could then convert amounts to her own Roth IRA if she wanted, but her taxes will be filed at the higher single rate unless she remarries. She could also do a direct rollover from the inherited 401k to an inherited Roth IRA if she wants and RMDs will still be deferred to when husband would have reached 70.5 and she would elect to assume ownership of the Roth before that. If there are any after tax contributions in the inherited 401k, she could do a split direct rollover with the after tax amounts going into an inherited Roth IRA, and pre tax to inherited TIRA.
If any highly appreciated employer stock in the 401k, NUA should also be considered since the NUA would be taxed at the lower LT cap gain rate when sold. But this would require a lump sum distribution from the plan. If the plan holds both after tax contributions AND appreciated employer shares, then some complex planning would be required with more details secured from the plan.
If wife is to consider any Roth conversions, her tax rate will probably be lower this year since this is the last year for filing jointly (although qualified widow status might apply). Rates also lower due to recent tax bill.