Inherited IRA confusion
My mother died in a car crash last month. She was not married, and I am the only child.
Her employer wants me to set up an “Estate” tax ID number on the IRS website. Should I do that? I’m also trying to confirm that I am the beneficiary on the 401k. If I am not the beneficiary on the 401k, but I get the 401k in probate, can I still put the money in an Inherited IRA?
If for some reason, I can’t do a rollover, what options do I have? Can ask her employer for payments over five years, or something like that? I want to do everything possible to avoid a lump-sum payment.
Permalink Submitted by Alan Spross on Sun, 2007-09-09 01:36
Sorry to hear of your loss.
It sounds like the employer believes that you are not the designated beneficiary, as the EIN is only necessary if the death benefit is to be paid to the estate. I see no need to act until they clarify who was the designated beneficiary on the various plans. There could well be more than one plan involved here as well as a group life or supplemental life insurance contract. If even one of the plans calls for payments to her estate, then you will need the number for that particular benefit payment.
One key issue if you are named as a designated beneficiary is whether the plan will do the non spouse direct transfer to an inherited IRA for your benefit. Most plans probably do, but under the PPA, the transfer is optional for the plan. Under the proposed technical corrections act in Congress, the transfer would become mandatory. You have time here, since the transfer deadline date would be 12/31/08. You could then take RMDs over your single life expectancy.
Now if you receive the funds through estate probate, then there is no IRA rollover available for you. The death benefit would be paid to the estate under either the 5 year rule if your mother had not reached her required beginning date, or over her remaining non recalculated life expectancy if she died post her RBD. If you do not keep the estate open that long, you would first attempt to have the benefits assigned to you directly so you can close the estate.
If you are not satisfied with the explanation you receive, you should request a copy of the plan documents for review.
Permalink Submitted by Janine Janine on Mon, 2007-09-10 02:20
How sad!! I hope everyone who reads the above posts takes immediate steps to ensure that he/she has a designated beneficiary of each and every plan: IRA, Roth IRA, 401k, 403b, life insurance policies, and trust. And, of course, a will. Why have your heir(s) go through probate and the concomitant delays, problems and expenses!
Janine
Permalink Submitted by Keith Barbaro on Tue, 2007-09-11 05:54
Thanks for the replies.
We’ll, I have confirmed that I am not the beneficiary on the 401k. My mom got in the plan in the mid-80’s when I was just 14 years old, and didn’t name me at the time. In all this time, she must’ve spent more time managing the account and never realized there was no beneficiary. I find that a little hard to believe, but that’s what her employer says.
I have no idea what I’ll do to avoid a lump-sum payment on the 401k.
As for her pension, she could not name me as a beneficiary. Only a spouse can be the beneficiary. So no ground lost here.
Permalink Submitted by Alan Spross on Tue, 2007-09-11 19:15
It appears that your Mom passed prior to age 70.5, therefore IRS rules require the full amount of the 401k to be distributed no later than 12/31/2012 (5 year rule). Talk to the plan to see if they will assign the benefit to you after you close the estate and give them evidence of such, or if they are requiring that a lump sum be issued within a certain time limit. If you cannot spread the income over 5 years, there is another option for you to consider.
Check with the plan administrator to see if your Mom held highly appreciated employer stock shares in the plan and if so, what the cost basis per share is. If a lump sum distribution (LSD) is taken you pay ordinary income tax only on the cost basis. The gain, known as net unrealized appreciation (NUA) is taxed only when you actually sell the shares and then at the lower long term cap gain rates. Those rates are currently only 5% in the 15% bracket, or if you stay in that bracket in 2008-2010 there is a -0- tax rate for federal. The LSD would probably put you in a higher bracket, so your top rate would be 15% and only when you sell those shares. Since you are apparently the executor of her estate, you could pass through the taxable distribution from the estate to your personal return on a K1. If you take any post death distribution from the plan this year, you must do the LSD this year. However, if you can get the plan to hold off and take no distributions, this can be done next year. This strategy depends on the amount of gain involved and other factors in your individual tax situation, but this could ease much of the pain of a LSD.