5-year Rule
Facts:
-401k plan with no beneficiary named
-Owner died in 2018 (pre-SECURE Act)
-RMDs had begun
-Spouse disclaimed her interest
-Under Will, daughters are next in line and have inherited the account
-Plan Administrator (Fidelity) confirmed that the 5-year Rule applies
Question:
-Under the 5-year Rule are the beneficiaries required to take RMDs or can they delay taking any withdrawals until the end of the 5-year period if they wish?
-If the the owner died in 5/2018, am I correct in assuming that the account must be emptied by 12/31/2023 (the end of the 5th year following the date of death)?
Permalink Submitted by Alan - IRA critic on Wed, 2021-02-17 23:50
There is a conflict here. You indicated that RMDs had begun, but that is inconsistent with the 5 year rule. Specifically, did owner pass prior to his required beginning date? If not, then the applicable distribution is based on the remaining life expectancy of the owner using his age in 2018.
If the 5 year rule did apply, then there are no annual RMDs, but the account must be drained by 12/31/2024 since 2020 is not counted. However, if they waited for the last year to take distributions and the value was significant, this could have a negative tax impact in 2024.
Participant’s date of birth would determine if he passed prior to RBD or not.
Permalink Submitted by Eric Chilton on Thu, 2021-02-18 01:21
Thank you.Owner was 87, so deep into his RMDs. So, if I understand you correctly, no 5-year Rule and the beneficiaries under Will need to take RMDs based on his remaining LE? The fact that the owner’s spouse disclaimed is irrelevant?
Permalink Submitted by Alan - IRA critic on Thu, 2021-02-18 02:09
The spouse is the automatic beneficiary of a qualified plan, unless they disclaimed. SInce spouse disclaimed (for both the plan benefit and the estate), the remaining life expectancy of the owner should apply since the estate became the beneficiary. I have no idea where the plan is coming up with the 5 year rule. It would be very rare, but the plan might contain some provision that caps the distribution to 5 years, but it would be a plan limitation, not the usual IRS 5 year rule. The plan administrator should be asked to explain where they are coming from with the 5 year indication.