Parents inherited the son’s 401k and ESOP

Submitted by Mhotchkiss on Wed, 2022-08-31 18:23

Facts – son, age 60 dies in 2021. Parents, age 80 and age 81 inherit the son’s 401k and ESOP, 50/50.

Question – Are the 401k and ESOP from same employer considered the same plan?
If so, does that mean the total could be converted to an inherited Roth IRA by the beneficiaries?

Question – I believe the parents are EDBs under new rule since they are older than participant. Correct?
If so, that means they can take stretch over their remaining life expectancy?

Question – Assuming they can and choose to convert to Inherited Roth, I assume they must still satisfy the 401k/ESOP inherited RMD for this year? If they did in fact convert their inherited 401k/ESOPs to Inherited Roth accounts, do they still have to take lifetime RMDs, or can they elect to take them under the 10 year rule and take nothing for years 1-9 and all out in year 10?

Thank you,
-m



Submitted by Alan - IRA critic on Wed, 2022-08-31 19:08

  • They are different plans, but both could be directly rolled into an inherited Roth IRA. There also might be NUA potential in each plan as an option to a rollover. The ESOP may contain special distribution limitations however.
  • Yes, parents are EDBs and can stretch over their remaining LEs regardless of which type of inherited IRA they select. However, their remaining LEs are only around 10 years. If they want more flexibility they could opt out of EDB status and into the 10 year rule. If a direct rollover of one of these plans to an inherited Roth IRA is being considered, they might opt out of EDB status for that plan, then not touch the inherited Roth for 10 years as it generates tax free gains on the entire inherited account value.
  • Son passed prior to RBD so there is no year of death RMD here.
  • So several potential options here including NUA for all or some shares in all or both plans, determining any ESOP share distribution limitations, rollover of all or part to an inherited Roth IRA, and whether or not to opt out of EDB and into the 10 year rule for one or both plans. 

Submitted by [email protected] on Wed, 2022-08-31 19:22

great.  thanks. -m

Submitted by David King on Fri, 2023-01-27 16:32

My Mom is the beneficiary of my Dads ESOP (they were never legally married, this is in Maryland). Because of this, I am told she cannot do a direct rollover to her own IRA account, and would need to take a lump sum distribution. She is not inheriting his IRA account (which was empty and had no beneficiaries listed). Thye’ve lived together 30 years and always assumed they were common lawed.She is 62, 100% disabled, and is on SSDI as her only income. She currently does not have a 401k or IRA. Is there a way for her to do a direct rollover and not be taxed? Would it be better to disclaim the ESOP, have is pass to my brother and I, and then we can do a roth ladder and “gift” her money each year?

Submitted by David Mertz on Fri, 2023-01-27 21:11

I assume that your father died after 2019.  Maryland does not recognize common law marriage, so your mother is a non-spouse beneficiary.  As such she is not permitted to roll the funds over to her own IRA but it should be possible to do a direct rollover to an inherited IRA for your mother’s benefit and I believe that the plan is required to offer this option because an ESOP plan is a retirement plan qualified under section 401(a).  If she qualifies as disabled for this purpose, she would be an Eligible Designated Beneficiary who would be subject to RMDs from the inherited IRA based on her life expectancy and not have to be subject to the 10-year rule.

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