401k inherited by sister 7 years younger
Client passed away at age 45, her sister is age 40 in 2024 and is 100% primary beneficiary of her 401k.
401k is 75% Roth and 25% Pre Tax.
Beneficiary has no need for the funds but my assumption of new distribution rules is sister would rollover the 401k plan into a Bene IRA for each contribution type(ie: Roth & Pre Tax) and could stretch since she is non spouse within 10years younger? Each Bene IRA type would need have an RMD starting in 2025 using sisters age divisor (age 41 in 2025 = 44.8) then continue reducing by 1 annually.
Being a Roth Bene IRA and not in RMD phase was inquiring if Bene Roth RMD’s could be deferred but think they could but then Roth Bene IRA would need to be closed in 10 years. So she may have two options but if she wants to stretch for next 20/30 years then Roth RMD’s must begin in 2025??
Permalink Submitted by Alan - IRA critic on Fri, 2024-09-27 11:31
Yes, both inherited IRAs would be subject to annual RMDs starting in 2025 because beneficiary is an EDB unless they opt out of EDB treatment.
She also has the option of directly rolling the smaller pre tax balance to an inherited Roth IRA, but of course that would trigger tax on the pre tax balance. But then she would have a single inherited Roth IRA that could be stretched 4 decades and all distributions would be non taxable.
It is possible that this 401k plan specifies that the 10 year rule applies even for EDBs, or the plan may provide that the beneficiary can make an election. Therefore, unlike inherited IRAs, the beneficiary is not automatically treated as an EDB. The beneficiary should contact the plan ASAP to determine the plan rules and what elections are required. The final Regs are not mandatory until 2025, so the plan may still be operating under the prior Regs. It would be advisable that the beneficiary complete the direct rollover process before year end if possible, to avoid being caught up in any plan changes made for 2025 to reflect the final Regs. Generally, the RMD provisions of the plan must be carried over to the inherited IRAs.