Inherited 401K rolled over to inherited IRA civil action proceeds and RMD question.
I inherited a 401k in 2018 (prior to the SECURE act changes). In 2022 I rolled it over in to an inherited IRA.
Since the decedent was post-RBD, I have been taking RMDs based on my life expectancy every year.
This year there was a settlement from a civil class action lawsuit against the 401k plan sponsor regarding events that occurred during the years that both the deceased and I held the 401k account. I, as the beneficiary, received a settlement check that was “designated for rollover into another retirement account”.
I deposited the check, as a rollover, in to the inherited IRA.
My question is regarding this years RMD. I’ve seen information online that seems to indicate that instead of using last years December 31st balance and dividing it by the “Life Expectancy Distribution Factor” (LEDF), I should instead first add the amount that I rolled in to the IRA this year to the 12/31 balance before dividing by the LEDF.
Is this correct?
Also, was rolling over the class action settlement the correct thing to do?
Thanks!
Permalink Submitted by Steve Chase on Mon, 2024-12-09 21:18
Just to clarify, both my brother and I rolled over our inherited 401k (which was split 50/50 from the decedents original 401k) to an inherited IRA in 2022.
Also, I filled out the form to have my settlement payment rolled over in to my inherited IRA, he did not respond to the notice, in which case, from the rollover form: “Former Participants who do not complete and timely return this form will receive their settlement payment by a check payable to themselves (subject to applicable tax withholding). ”
So I believe he received a check made out to him, not to the 401k (I may be wrong about this, and I am unable to contact him right now, but that appears to be what the notice is saying).
If the check is not made out to the 401k, does that change things?
I would still think that the amount would be counted as a distribution from the 401k that no longer exists, in which case it would have no affect on his inherited IRA 2024 RMD, which he would then have to take in full. I’m just not sure what he would have to do with the settlement amount as far as tax reporting.
Permalink Submitted by Steve Chase on Wed, 2024-12-25 19:31
What happened to all the other replies and responses that were in this thread? They are mostly gone now?
Anyway, I just got another problem related to this.
I was just made aware that ANOTHER check was sent. Made out to the deceased this time (instead of to me or my brother, the beneficiaries). I am guessing this is the settlement payment for the time when the deceased owned the 401k prior to their death. I assumed that would all be part of what the beneficiaries got and not be a separate check, but apparently that was wrong.
Since I was unaware of it (the notice and check was sent to the widow who didn’t notify me until just now), I did not have any way of researching this before.
They withheld federal tax from it (but not state),which I guess is attributed towards the deceased SSN, but I’m not sure…
Since the estate is closed (the deceased died in 2018) I’m not sure how to deal with this check. Do I have to open a new bank account for the estate and deposit it since the check is made out to the deceased? Do I have to reopen the estate? Can I try to call the issuer of the check and have them issue it to the two beneficiaries instead? Will that also change the withholding to be for each of the beneficiaries instead of being for the deceased’s SSN?
I don’t know if this is something I need to deal with before the end of the year, or if it becomes more complicated if it’s not dealt with before then.
I really hope this does not become a nightmare like the entire estate process was, I thought I was done with all that headache….