401k to IRA with estate planning in mind
78 year old client still working has a 401k. He has a younger spouse age 64. The wife plans to inherit the 401k (as beneficiary designee) and then roll to an IRA.
My question is when the surviving spouses dies with the funds in an IRA (that came from an inherited 401k) can that IRA be inherited by the kids? My hunch is that an inherited 401k must go into an IRA titled “deceased spouse, FBO surviving spouse”, so then the kids could not inherit this IRA when the surviving spouse dies. (It would be required by law for the IRA to be disbanded and taxed), is that correct?
It seems as general principal in estate planning it is much better if the employee rolls his 401k into his own IRA while he is alive, is that correct?
Permalink Submitted by Alan Spross on Mon, 2008-06-02 19:26
No, the rules are broader than you thought.
The surviving spouse can roll the inherited 401k to their own IRA account, ie. held as owner rather than beneficiary. They can commingle this with other owned IRAs if they wish. Designated beneficiaries of that IRA such as children can stretch distributions over their life expectancies. In this case, RMDs would not be required until the survivor reached 70.5.
In situations where the surviving spouse is under 59.5, the 401k can be transferred into an inherited IRA so that the survivor can take distributions without penalty. At 59.5 or at any later date the survivor can assume ownership and this is often done once the penalty would no longer apply.