IRS Notice 2007-7
IF a son inherits the 401k from his father who died, is he able to do non spouse rollover and do stretch. Last I heard was that it was optional for Emplpoyer plan to include this.
If this is the case and employer has not allowed for it, what are options for son regarding the 401k assets? Lump sum, 5 year payout, etc?
Am I correct that if employer has not allowed the provision, that the son cannot do an inherited IRA?
Permalink Submitted by Alan Spross on Fri, 2009-06-19 19:56
The transfer is the only way to get the funds into an inherited IRA. However, WRERA made offering the transfer mandatory for plans starting after 12/31/09, so the son cannot be denied the transfer when that kicks in. However, there remains the ruling in 2007-7 that the inherited IRA must follow the plan RMD rules if the transfer is not done by 12/31 of the year following father’s death. So if father passed in 2008 or earlier, even getting the transfer done may not produce the stretch for the son.
We also have Notice 2008-30 allowing the stretch if the first few life RMDs are missed, but that ruling applied to inherited IRA accounts, not to an inherited employer plan. So if father passed prior to 2009, the transfer may not solve the problem as it would be too late. If he passed in 2008, better press the plan to get the transfer done by year end, as they must have procedures in place to offer this in January anyway.
Permalink Submitted by Brian S Seaman on Fri, 2009-06-19 20:51
Thank you. Father passed away last week. Since original post and your response I learned that Employer plans must allow for the non spouse inherited IRA in 2010, as you state.
I am having son contact employer to determine if the plan does allow for the transfer now. If it does not we will wait until January and then do the inherited IRA. This will be within the one year after death and Employer plan must allow the son to do the inherited IRA and take withdrawals over his life expectancy.
I appreciate your comments., Thanks
Permalink Submitted by Alan Spross on Fri, 2009-06-19 22:31
Note that if the son would benefit from a Roth conversion, he could make the transfer to an inherited Roth IRA, which is the only way for him to get these particular funds into a Roth. An inherited IRA cannot be converted once the funds have been transferred to it, at least under current law. Of course, either type of IRA will require RMDS to be taken. The plan is only obligated to offer one direct rollover, so they might not agree to sending part of it to a TIRA and the rest to a Roth. But any part that he does convert to a Roth in 2010 can be reported 50% in 2011 and 50% in 2012, which splits the taxable income and defers it. A direct Roth conversion attempted this year is still subject to the 100,000 income limit, but this is the last year for the income limit.