Inherited IRA
I recently lost my husband (6/2021). He had an employer sponsored 401K and when I called to let them know he past and what I need to do with his account they scheduled an appointment to meet with an FA. We went over what my plans were for the account and I did mention that I wanted the account to keep growing but I also wanted to have it for in case of an emergency since I am now the only income provider in the house and I have 3 children to care for. I mentioned paying off a few debts, etc however he advised against it because the interest rate was not a high one. He ended up rolling my husband 401K into a IRA. About a month or two after that I learned that my husbands 401K should be rolled into an inherited IRA so I do not have to pay the 10% penalty only taxes. I called FA and asked what type of account he rolled my husbands into and it was a regular IRA which I would incur taxes and penalty with each withdrawal. I questioned why he did that if I had mentioned that I wanted this account to grow but also as an account if I ever had an emergency. He gave me a long story and ending with, even if we rolled it into an inherited IRA you would be forced to take distribution, but that he would look into it. After a day or so he called me back apologizing, he was mistaken I would not be forced to take distribution and he was going to get the account fixed to be an inherited IRA. After a few weeks, I received a call back from my FA apologizing because he was not able to get this fixed and that I would have to stay with the was they set up the account – i would not be stuck with paying taxes and penalties. He mentioned that he tried appealing this but that higher ups within this organization denied it. I was never aware that this was being appealed the conversations I had with my FA he made me understand that they were working on fixing the account to an inherited IRA and to distribute the money I needed for my emergency.
Can this account be corrected? Why is it that I am being made to feel like it was my mistake? I was dealing with the loss of my husband and I would expect that the FA should have guided me correctly.
Permalink Submitted by Alan - IRA critic on Mon, 2022-02-07 19:33
The mistake was all his and was very basic, one that a beneficiary might make, but not a competent advisor. Since you were referred to him by the 401k administrator, you should let them know that the FA advisor made a critical error, and perhaps the plan should rethink referring business to him. He also did not understand that if a participant passes prior to age 72, the spousal beneficiary does not have to take beneficiary RMDs until the year the participant would have reached 72.
Unfortunately, under the tax code there is no way to change an owned IRA back into an inherited IRA unless the IRA custodian made the error and misinterpreted the request from the FA, but that did not happen in your case.
What is your current age? You may have to consider a 72t plan under which you would partition the owned IRA into two accounts and set up equal annual distributions from one of that that would be penalty free. While these plans are rigid and include strict limitations and must run the longer of 5 years or until you reach 59.5, if you will need frequent distributions a 72t plan may be worth considering, but you would need an advisor much more competent than the current one to set up one. Again, how long you have until 59.5 and how much you are likely to need from the IRA before then is the key factor.
You may also consider filing an claim against the advisor for his obvious flawed decision. That said, the amount of damages is hard to determine and would be based on the amount of your lifetime penalties before 59.5, and that of course depends on how much you will need in distributions, and you cannot predict that accurately.
Permalink Submitted by Estela Jackson on Mon, 2022-02-07 20:43
Thank you! I am 42 y/o, my husband was 52 when he passed. So far the only emergency I have is this one but don’t know about the future. My plans are to let it grow however I also need this available to me without additional fees. Again thank you for your response.
Permalink Submitted by Bruce Steiner on Tue, 2022-02-08 15:07
What did the lawyer handling his estate recommend?What does he/she recommend now?
Permalink Submitted by Estela Jackson on Tue, 2022-02-08 17:07
We did get a lawyer for his POA and Medical POA, but once he passed. I just informed the 401K company. Maybe I can run it by the same lawyer who did the POA or maybe get with a CPA. I have escalated this up to the FA’s manager and they are looking into this – we’ll see what happens. Regardless I will file a complaint against this FA and I will no longer have him as my FA.Thank you.