401K NO BENEFICIARY – DEATH OF OWNER IN 2016
Client’s father passed away in 2016 and she and her sister just learned he had a 401k plan with no beneficiary designation. He was 60 years old and not married when he died. He did not have a Will but the daughters were previously appointed as Administrators of his estate so Letters of Administration can be updated. Can my client transfer her share to an Inherited IRA? Given the death was in 2016, is there a 5-year or 10-year rule that apples?
Permalink Submitted by Alan - IRA critic on Sat, 2025-02-22 14:19
An estate inherited 401k cannot be rolled over to an inherited IRA under IRS Regs.
How did the daughters find out about this account, and when did the plan learn of the participant’s death? If participant passed prior to RBD, the 5 year rule would have required the plan to be drained by the end of 2022 (2020 is disregarded). Most plans will also push out a total distribution to the estate as soon as they know the estate’s EIN, and if the estate was closed it will have to be reopened to receive the distribution.
Permalink Submitted by Carolyn Douglas on Sat, 2025-02-22 16:42
Thank you for the quick response. The deceased received the account in a divorce settlement and the daughters thought he had fully distributed the account over several years for living needs but somehow discovered that was not the case. They recently notified the plan provider and are getting the estate reopened. Once the estate has been reopened, it sounds like a fully taxable distribution will be made only to an estate account. Do you know if penalties and interest will be assessed at the estate level? I suppose a subsequent estate distribution to the daughters will cause that taxable distribution to flow through to them.
Permalink Submitted by Alan - IRA critic on Sat, 2025-02-22 18:05
Yes, most likely a total distribution will be made to the estate. Whether the participant passed prior to RBD or not, there are RMD shortfalls that will be made up with the total distribution but Form 5329 will have to be filed for certain years to request the penalty waiver. Those years depend on whether participant passed prior to RBD or not.
Yes, ordinarily the estate would pass through the distribution to the estate beneficiaries on a K 1 and the beneficiaries will be taxed on this. They may want to plan for paying estimated tax payments or use other withholding. Withholding by the estate should be avoided.