Inherited 401(k)
Father died in 2007. Non-spouse beneficiary requested, and the plan approved, a rollover distribution to an inherited IRA in 2007. The amount of the distribution $123K was based on the value of the 401(k) as of 12/31/2006 (as per the plan) . However, due to the finances of the plan, they were unable to produce sufficient cash to actually make the rollover until 2008.
Question: Will the IRS accept the full $123K as a non-taxable rollover. Or, will we have to use the new 12/31/2007 value for the rollover. (2007 value is a lot less, but the plan is willing to use the 2006 value since the distribution was requested in 2007).
Thanks!
Permalink Submitted by Al Fry on Mon, 2008-07-21 02:04
It would seem at the instant of death, the 401 Death Benefit became the beneficiary’s, regardless of how long it took them to do the Direct Rollover. Al
Permalink Submitted by Alan Spross on Mon, 2008-07-21 03:22
The plan should not transfer the amount of the 2008 RMD, and the plan must have a 12/31/07 balance on which to figure that RMD. The plan did not address this?
You did not indicate whether age of the decedent, but it is possible that the decedent had a 2007 RMD that was not made prior to his death. In that case, this RMD also needs to be deducted from the IRA transfer and paid directly to the beneficiary as a taxable RMD.
Other than those RMD issues, the plan should just transfer the remaining balance to the inherited IRA. The value as of any particular year end is only material to figuring an RMD obligation.
I am not sure if this addresses your question, if not please clarify.
Permalink Submitted by Jerry Logan on Mon, 2008-07-21 04:54
Thanks for taking the time to reply.I understand the RMD issues. Your reminder not to transfer the 2008 RMD is very helpful. However, here is the issue as I see it.
The plan uses balance forward. Requested distribution in 2007 and took RMD in 2007 based on 12/31/06 value. This left $123K which the plan was unable to distribute in 2007 due to financial shortfall. Now, in 2008, the plan is willing to distribute the full $123K based on 12/31/06 value.
But, the plan year calls for re-valuing the 401(k) on 12/31/xxxx of each year. So now, even though the plan is willing to transfer the full $123K, the 12/31/07 value is $92K. So it seems to me there are two questions. First, should the 2008 RMD be based on $123K (amount the plan is willing to transfer) or $92K (value of the plan on 12/31/07)? Second, If the plan reports that the value of the plan is $92K as of 12/31/07, how is the IRS going to react to a $123K transfer? Will they consider everything in excess of of the $92K as an ineligible transfer subject to ordinary taxation?
I hope this clarifies the issues.
Permalink Submitted by Alan Spross on Mon, 2008-07-21 22:17
The 2008 RMD should be based on the 12/31/07 value, but it seems very odd that the balance in the plan subject to distribution was fixed in time. Was the balance frozen or something, and is the Dept of Labor involved here?
This is not a normal situation if the amount to be distributed was fixed at 123,000, but the value on 12/31 was far less. But cutting through the missing links, as long as the 1099R shows a direct rollover to an IRA, all taxes on the rollover are deferred.
Moreover, the IRS does not get year end balance info on 401k plans like they do on IRA accounts, so the rely on the plan to determine and distribute the correct RMD each year. It would be very rare for the IRS to question the amount of a plan RMD unless it looked totally illogical.
The IRS is used to huge value fluctuations in investments from a year end to the date of IRA transfers. I would not worry about the difference, although it is confusing what may have transpired with this plan along the way.
Permalink Submitted by Al Fry on Tue, 2008-07-22 01:48
Perhaps it was an under-funded allocated plan.
Permalink Submitted by Jerry Logan on Tue, 2008-07-22 05:17
Thanks for both your help. Alan on the RMD and Al hit the nail, under-funded allocated plan.
Thanks again.
Jerry