Young widow inheriting husband’s 401k

Submitted by Tom Parra on Tue, 2018-05-15 17:40

I have a 38 year old female client whose spouse of the same age passed away about 8 months ago. There are no children and she is the sole beneficiary of his employer 401k held at Fidelity. We would like to know if she has any options in the unlikely event that she should need access to some of this money prior to age 59 ½ without having to pay the 10% early distribution penalty.

1. Would this penalty be avoided if she were to establish an Inherited Spousal IRA account at Pershing and do a trustee to trustee direct rollover? If so, is there precise wording that needs to be used and does the deceased’s name need to appear in the registration? In other words, how exactly should the registration read or be titled?

2. If the Inherited Spousal IRA were to work, does it carry the same creditor/bankruptcy protections that a TIRA carries?

3. If an Inherited Spousal IRA were to be established, and in the event it does not afford some of the same protections, can some of the Inherited Spousal IRA account monies be transferred shortly thereafter and prior to the account being funded, to a TIRA or possibly two separate TIRA’s under her own name? If so, does the once every 365 day rule come into play?

4. My understanding is that neither of these two plans would require RMD’s until age 70 ½, correct?

5. How do these two plans differ as to what options beneficiaries would have in receiving death proceeds?

Any other options or insight you can provide as to this situation would be greatly appreciated.



Submitted by Alan - IRA critic on Tue, 2018-05-15 19:05

  1. A direct rollover to an inherited IRA would allow for distributions without penalty since the 1099R will be coded 4 to signify a death distribution. There are no RMD until deceased spouse would have reached 70.5. The beneficiary RMD title must include her name as beneficiary and husband’s name as decedent. Other than including both names, the format preferred by the inherited IRA custodian will suffice and these can vary.
  2. A spousal inherited IRA will still get the same creditor protection as an owned IRA in the state of residence. Some states fully protect IRAs from creditors, but not all. Note that inherited IRAs are still TIRAs or Roth IRAs.
  3. While an inherited IRA of a spouse can be rolled over in total or in part anytime, this cannot be reversed. A spousal rollover will subject all pre age 59.5 distributions to the penalty in the absence of a 72t (SEPP) plan, and spouse is far to young to consider a SEPP. The one rollover per 12 months limitation applies when a distribution is rolled over and this includes beneficiary distributions. That said, the surviving spouse could do a partial direct transfer to a new beneficiary IRA, then elect to assume ownership of that IRA without a reported distribution.
  4. That is correct as long as the spouse was the sole beneficiary.
  5. A distribution from an IRA titled in beneficiary format is not subject to penalty, but a distribution from an owned IRA is unless the spouse qualifies for a different exception than being 59.5. For example, disability, higher education, SEPP, etc.
  6. Surviving spouse should check if the 401k includes any after tax contribution (non Roth) or a designated Roth portion since the direct rollovers must be carefully planned to avoid any errors. Also, the 401k could include some highly appreciated employer shares eligible for NUA and if the shares are rolled to an IRA, any NUA option is forfeited. Surviving spouse should name her own beneficiaries ASAP. If surviving spouse were to pass before RMDs are required, her beneficiaries will still be treated as designated beneficiaries.

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