Minor beneficiary of non-parent 401k distribution rules
My client’s 4 minor children were beneficiaries of their Aunt’s 401k Plan when she died in 2021. Now, the money is in each of the minor children’s names in 4 separate accounts within the 401k plan. What are the distributions rules for these minors IF they leave the money in the 401k plan? Are the distribution rules any different if they roll the money out of the plan and into an Inherited IRA? What, if any, are the differences?
Permalink Submitted by Alan - IRA critic on Tue, 2024-07-30 12:23
These minors are not EDBs because they are not the children of the 401k participant. Accordingly, unless disabled they are subject to the 10 year rule. Being minors, distributions must be made to a custodian or appointed guardian for each until they reach the age of majority.
If aunt passed post RBD they must take annual RMDs which would be very small due to their age, probably small enough to escape the kiddie tax based on their parent’s tax rate. These RMDs are based on each one’s single life expectancy if the separate accounting was established before the end of the year following the year of aunt’s death. The IRS waived such annual RMDs for 2022-2024 for 10 year rule beneficiaries but they will be required from 2025 forward. The plan may or may not have made distributions up through this year.
If aunt passed prior to RBD there are no annual RMDs required prior to year 10.
The rules are the same if direct rollovers are done to separate inherited IRAs.