401k to inherited IRA: please unconfuse me!
Dad died in 2006. His 401k, which had already begun annual RMDs, had his 2 daughters named as beneficiaries. The trustee split Dad’s 401k in half, establishing 2 equally funded accounts in each daughter’s name, each under their own Social Security #. In December 2006 each daughter received ½ of the RMD that Dad would have gotten for 2006. They each received their own 1099Rs and each included that RMD payment on their 2006 taxes.
One of the daughters wants to take advantage of the new inherited IRA tax deferral option as afforded by the Pension Protction Act of 2006 (and as most recently clarified by the IRS on or around October 24, 2007).
The Trustee claims the Plan Administrator had already decided to allow this type of PPA-2006 option, and seems to know how to go about accomplishing this. This Trustee, whom I’ll call “JBMorjan”, couldn’t establish the inherited IRA within their own firm, but they conferenced me in with a firm that could, who I’ll call “AmericanSentry”.
I’ve received forms from each of these firms, and I’ve been assured that completing them will effect the necessary trustee-to-trustee transfer that will allow for continued tax deferral. I really don’t want to screw this up, so while I have them on the phone, what are the EXACT questions I need to ask to make sure THEY don’t screw this up? Their forms don’t seem to have a place where I can specify the EXACT TITLING of the new inherited IRA. Should I add precise titling instructions, and if so, what should it be? Also, there doesn’t seem to be anyplace where I request the RMD for 2007. Don’t I have to take the 2007 RMD before the existing trustee transfers the money to the new trustee? And if so, what RMD should I take, the one based on the deceased employee, or the recalculated RMD based on the daughter’s life expectancy?
Lastly, I’m not thrilled with using “AmericanSentry”, but I’m willing to use them just so I can make sure this is done before Dec 31 (that’s the deadline for somebody in this situation, right?). I’d rather use someone like “TDMerryMaid”, but they gave me ZERO confidence that they would title the inherited IRA properly. Once I have a properly titled inherited IRA, there’s nothing preventing me from changing trustees next year, is there?
Thanks. Sorry for the wordiness, but I hope you got through it with a clear enough understanding to be able to give me some rock solid advice.
Permalink Submitted by Alan Spross on Tue, 2007-11-20 20:10
Your understanding is mostly correct.
The urgency of the 12/31 deadline depends on whether the plan itself will allow the use of the daughter’s life expectancy for the RMDs. If the plan will allow that instead of the remaining life expectancy of Dad, then the transfer can take place anytime, as the inherited IRA must continue under the plan RMD provisions for transfers done beyond 12/31 of the year following owner’s death.
The wording of the inherited IRA does have some flexibility as long as it lists the beneficiary name and name of deceased account owner, and carries the SSN of the beneficiary. One example would be “Susan James as beneficiary of Donald James, deceased xx/xx/2006.” Some firms like to list the decedent first, eg “Donald James, deceased xx/xx/2006 FBO Susan James, beneficiary.” The IRS does not care about the order as long as all the basic data is there.
The 2007 RMD should be distributed from the plan accounts prior to the transfer using the single life expectancy of each beneficiary based on their attained ages in 2007, and that RMD should be considerably less than Dad’s final RMD for 2006.
If you use the recommended IRA custodian, and later on are not happy with them, you can make further transfers of the IRA account, as long as they are direct transfers, and NOT a rollover.
If you cannot get written assurance that each daughter can use their own life expectancy for plan RMDs, you really have no choice but to push forward and get the transfers done prior to year end, actually prior to the Holidays considering the potential for year end foul ups.