401-K Spouse Rollover
I had a male, age 54, die in an auto accident recently. He has a 401-K with his employer with his wife ,age 55 ,as the sole beneficiary.
I’m trying to advise the wife on her options in terms of the 401-k rollover. She has insurance benefits coming which will be tax free.
My understanding is as follows:
Options: Trustee to Trustee
a. Roll the husbands 401-k into an IRA in her name which will subject her to the 10% tax if she withdraws money before she is 59 &1/2. She won’t have to take RMD’s until she turns 70 & 1/2. Her beneficiaries will be able to take advantage of the stretch at their age.
b. Roll the 401-k into an inherited IRA and remain as beneficiary in title and name a successor beneficiary. She avoids the 10% tax if she withdraws funds before 59 & 1/2, but her beneficiaries will have to take RMD’s based on her age. Also the carrier I currently use will require her to take RMD’s because their system can’t support a inherited IRA any other way. I’m not sure of the exact language needed to set up this option.
Is there another option for the wife? Is the deciding factor, her need to access the funds prior to age 59 & 1/2? Your comments will be appreciated.
Bill Cooke
Birmingham, Al
Permalink Submitted by Bruce Steiner on Mon, 2009-04-06 19:43
She can roll it over into an inherited IRA in her husband’s name with herself as beneficiary at a different financial institution.
Or, if she keeps it at the same financial institution, perhaps she can roll what the financial institution thinks are required distributions over into another IRA since those distributions aren’t really required.
But before doing anything, she should discuss with her attorney whether disclaimers are appropriate.
Permalink Submitted by mk foss on Mon, 2009-04-06 21:11
First, of all. Is it possible to leave the funds in the 401k until she reaches 59.5? That would be the easiest solution.
As Bruce indicates, it could be rolled into an inherited IRA. Unfortunately the tax provision only speaks to nonspouse beneficiaries. Even before that law was enacted, IRS had allowed a rollover to an inherited IRA for a surviving spouse in private letter rulings. I don’t know how everyone involved feels about doing this without a ruling.
If it is rolled to a beneficiary IRA, she does not have to take RMDs. The firm that it is invested with should assume that she is not in compliance with RMDs, rather than forcing them when not required. When she reaches 59.5, you’ll want to roll it to her own account in any case. It could be that she will need to draw from the account funds that equal or exceed the RMD required of a nonspouse.
As Bruce indicated, all of these decisions should be coordinated with her estate planning advisor. Too often retirement plan decisions are made too quickly and they generally cannot be undone.
Permalink Submitted by Robert Wright on Wed, 2009-04-08 13:55
mgtf4cpa:
You said “If it is rolled to a beneficiary IRA, she does not have to take RMDs.”
1. By [b]beneficiary IRA[/b] do you mean an IRA that is registered something like: [b]”IRA FBO husband, deceased, FBO wife, beneficiary” [/b]
2. Are spouses exempted from taking RMDs from a beneficial IRA?
3. What is the difference in an inherited IRA and a beneficial IRA? Is the inherited IRA registered in the name of the survivor? In this case: [b]IRA FBO WIfe[/b]
Thanks.
Permalink Submitted by Denise Appleby on Wed, 2009-04-08 14:44
Apologies in advance for nondetailed responses. In a class.
1. Yes. But most many will not accommodate such transactions for different reasons. Primarily CIP rules, and ‘who signs the adoption agreement’. I.e. you cannot open an IRA for me, and I cannot open one for you. And, will not open IRA for deceased.
2. No. But under the RMD rules, she (spouse) would not need to start until he would have been age 70 ½, had he lived
3. None. Inherited IRAs are registered in the name of the decedent, FBO the beneficiary. Any variation will work, as long as you can tell who is the owner and who is the beneficiary.
Permalink Submitted by Robert Wright on Wed, 2009-04-08 15:27
Thanks.