401(k) With Estate as Beneficiary
I’ve seen this topic many times but I couldn’t find a complete answer for this scenario.
Father passes away after RMDs have begun, and names estate as beneficiary for 401(k). Daughter, is executor, and sole beneficiary of estate. 401(k) provider will not allow a trustee to trustee transfer and will only distribute 401(k) to estate, while withholding 20% for IRS.
1. Am I correct in assuming, we can create an Inherited IRA for daughter, distribute 401(k) to estate (minus the 20% withheld), rollover distribution to Inherited IRA within 60 days, replace the 20% withheld with personal funds, and then receive a refund for the 20% withheld?
For example, 100k in 401(k). We request distribution. 401(k) distributes 80k to estate and withholds 20k. We rollover 80k to Inherited IRA within 60 days and contribute 20k from daughter’s personal assets to make up for the amount withheld. Lastly, file tax return for the 20k withheld as we distributed 100k from the 401(k), and rolled over 100k to an inherited IRA within 60 days.
2. Am I correct that this would be a non-taxable event?
3. When the 20k is withheld, does the estate file the tax return or would the daughter file in order to be reimbursed for this withholding?
Can someone answer these questions and also cite their source? Thanks in advance!
Permalink Submitted by Alan Spross on Mon, 2008-03-17 01:38
Unfortuneately, only a spouse can rollover such a distribution. Even Sec 829 of the PPA does not provide for transfer of employer plan death benefits to an inherited IRA when the estate is the beneficiary.
Per Pub 590, p 26 – “Rollover by Non spouse beneficiary”. Requires the non spouse beneficiary to be a designated beneficiary. An estate is not a designated beneficiary.
However, since the distribution is NOT an eligible rollover distribution, the mandatory 20% withholding should not apply.
Since employee passed after the RBD (verify that this is the case), the plan must follow this rule from the IRS Regs: (see final paragraph)
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Q–5. For required minimum distributions after an employee’s death, what is the applicable distribution period?
A–5. (a) Death on or after the employee’s required beginning date. If an employee dies after distribution has begun as determined under A–6 of §1.401(a)(9)–2 (generally on or after the employee’s required beginning date), in order to satisfy section 401(a)(9)(B)(i), the applicable distribution period for distribution calendar years after the distribution calendar year containing the employee’s date of death is either—
(1) If the employee has a designated beneficiary as of the date determined under A–4 of §1.401(a)(9)–4, the longer of—
(i) The remaining life expectancy of the employee’s designated beneficiary determined in accordance with paragraph (c)(1) or (2) of this A–5; and
(ii) The remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A–5; or
(2) If the employee does not have a designated beneficiary as of the date determined under A–4 of §1.401(a)(9)–4, the remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A–5.
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This distribution should be made to the estate and from there passed through to the estate beneficiary on a K1. If the estate is terminated, the plan should be requested to distribute the RMDs direct to the estate beneficiary, and the original RMD schedule based on decedent’s remaining life expectancy would continue to apply.