Rolling 401k (with no listed beneficiaries) to inherited IRA through estate (Maryland)

Submitted by David King on Thu, 2023-06-01 16:43

As the title suggest, I am trying to understand if I can move my dads 401k, which had no beneficiaries listed, to an Inherited IRA for the benefit of my mom (non-spouse).

Basically, my parents were never married, so my brother and I are the admin of the estate. The 401k had no listed beneficiaries, so what I’m guessing is that the estate will decide where the 401k goes, and I will distribute it to my mom. What isn’t clear to me is if it’s legal that the 401k would go to the estate, and then to my mom as an Inherited IRA in the name of “dads name” for the benefit of “moms name”? Fidelity says this is possible, and the only other confirmation I have found is this article:

https://www.wealthmanagement.com/estate-planning/ira-goes-estate-inherited-iras-individual-beneficiaries

The reason this is important is because she is listed as the beneficiary of a much larger ESOP, which can only be rolled over if she has an inherited IRA in the name of the decedent, aka my dad. Without this, she will take a lump sum distribution which would be a nightmare for taxes.

To confirm, the 401k did not list ANY beneficiaries, which is why it will default to the estate. But as the personal rep, can I effectively designate my mom as the beneficiary, and have it rolled over to her as an Inherited IRA?



Submitted by Alan - IRA critic on Thu, 2023-06-01 17:07

  • A direct rollover of a 401k or ESOP to an inherited IRA is only allowed for a designated beneficiary. Your Mom can set up an inherited IRA showing dad’s name as decedent and hers as beneficiary of the ESOP since for that account she was designated. However, if the 401k plan does not include a default beneficiary other than dad’s estate, that plan cannot do a direct rollover to an inherited IRA for anyone. In that case, the 401k plan will typically issue a lump sum distribution check to the estate. If dad had a will, you will probate the will and the 401k distribution will go to the beneficiaries of his will. If no will, then state intestate provisions determine where the estate funds will go. In most states where the decedent was single, the intestate provisions will direct the funds to the children.
  • The article you posted refers to the death of an IRA owner. That article does not apply to the death of a qualified plan (eg 401k) participant. Therefore, there is no way for the 401k balance to be directly rolled to an inherited IRA.  I assume the 401k administrator has confirmed that the estate is the default beneficiary, and not the spouse (not applicable here) or children.

Submitted by David King on Thu, 2023-06-01 17:27

Your Mom can set up an inherited IRA showing dad’s name as decedent and hers as beneficiary of the ESOP since for that account she was designated. 

To confirm what you are saying, we can create an inherited IRA from the ESOP alone? I assumed she would need to inherit a separate account (an IRA or 401k) in order to have an inherited IRA. So we could go to a fidelity or Vanguard and simply create an inherited IRA in my dads name, and do a direct rollover of the ESOP?

Submitted by Alan - IRA critic on Thu, 2023-06-01 19:14

  • Yes, since the ESOP is a separate plan from the 401k and you indicated she was named as beneficiary. 
  • If the ESOP has a very low cost basis per share, NUA might be considered, as the gains would be taxed at the lower LT cap gain rate. This adds complexity, but perhaps should be considered. A cost basis quote should be requested from the plan. This option is erased if the plan is rolled into an inherited IRA.  NUA is probably not the best option unless the cost basis in relation to the current value is under 25%.

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