401K beneficiary RMD requirements and calculations

Submitted by JL Hayden on Tue, 2024-05-21 09:50

My mom passed on December 30, 2023 age 84 after receiving her 2023 RMD in mid December. I inherited her 401K in April of this year and as her designated beneficiary have to rollover the account to an inherited IRA or take a forced full payout check after 60 days.

I now have everything ready to rollover into my new IRA account but just found out the plan, RTX, says a RMD is required. The RMD portion of the balance is not available to rollover, has to be paid out. I asked RTX what plan or IRS rule prescribes the mandatory RMD after not finding any guidence in their summary plan document but no answers so far.

They did tell me the RMD was based on the December 31, 2023 account balance and used my deceased mother’s age in the calculation not mine as I am 63. Is this the correct treatment?



Submitted by Alan - IRA critic on Tue, 2024-05-21 14:51

The plan is required to distribute your 2024 beneficiary RMD prior to your doing a direct rollover of the balance to your inherited IRA. Because a direct rollover is a distribution from the plan, like any other distribution in an RMD distribution year, the first distribution in such a year must be applied to the RMD for that year. This rule is the same for an owner or a beneficiary.

However, the plan is incorrect about the RMD amount. Mother’s age does not apply here. The RMD would normally be calculated from the single life table based on your age, the age you attain on your birthday in 2024.

That said, you are a 10 year rule beneficiary and must drain the plan or inherited IRA by the end of 2023 and because Mom passed after her own RMDs had begun, you must take annual RMDs in years 1-9 under the proposed Secure Act Regulations. But because these Regs are not yet final, the IRS has waived the beneficiary RMDs for 2024 in Notice 2024-35 as posted below. However, if you want to equalize your taxable income over the 10 year period to prevent a large taxable distribution at the end, you might want to allow the plan to distribute the RMD even though the IRS does not require it. It’s also possible that the plan rules do not recognize the Notice posted below.

https://www.irs.gov/pub/irs-drop/n-24-35.pdf

 

Submitted by JL Hayden on Tue, 2024-05-21 16:59

Thank you for the reply, it is appreciated!

It would seem more reasonable if the RMD was calculated based on my age as I will be the one taxed on the distribution next year. Is there any written IRS guidence on which table should be used for inherited 401K’s? Can’t find any specifics in Publication 575, 590-B etc.

RTX said the calculation was not based on my age was because I was the beneficiary of a beneficiary? I don’t understand what, if any, difference that makes? Dad was the original UTC now RTX employee, mom got the 401K when he passed in 2018.

Submitted by Alan - IRA critic on Tue, 2024-05-21 20:04

So, being a successor beneficiary changes everything. You did not indicate that in your prior post.

If Mom was herself a beneficiary of the plan instead of being the participant, as a successor beneficiary you are indeed not allowed to use your own LE and instead must continue Mom’s RMD schedule. The applicable divisor will the divisor that applied to her in 2023, reduced by 1.0 for 2024 and each year thereafter. While you are also subject to the 10 year rule, the inherited plan will not quite last 10 years because her divisors would fall below 1.0 in year 8.

She should have rolled this over to her own IRA (spousal rollover). That would not only have reduced her RMDs, but then you would be a designated beneficiary with lower RMDs but still subject to the 10 year rule. However, as it stands these RMDs will reduce the balance about equally for 8 years and that avoids a large distribution in the final year that could cause you tax problems in that year, so the current developments are not all that bad.

 

Submitted by Alan - IRA critic on Tue, 2024-05-21 22:35

Sorry, but I erred in the last post and have edited it to make it correct.

The change is that because you are a successor beneficiary, you are not even eligible for a direct rollover to an inherited IRA, so don’t open the inherited IRA. Only a designated beneficiary is eligible for such a rollover. Therefore you are stuck with the current plan, and you should hope they do not require a lump sum distribution in this case, as many plans do.

Sec 402(c)(11)(A) is the tax code section limiting these rollovers to designated beneficiaries and is copied below. You are a successor beneficiary:

(11)Distributions to inherited individual retirement plan of nonspouse beneficiary
(A)In general If, with respect to any portion of a distribution from an eligible retirement plan described in paragraph (8)(B)(iii) of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—

 

 

 

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