Beyond my field of expertise. Taxes. Help.
A friend has come to me with a 401(k) that she inherited from her father. The father died 5 years ago and the 401(k) plan was simply transfered to her position or name. She needs access to the money.
What is the most tax efficient way to have access to the money? I have ideas but i’m really not a tax expert.
Thank you in advanced.
Permalink Submitted by Alan Spross on Fri, 2009-06-26 23:52
I assume the plan changed the registration to show her beneficial interest only, as her father’s name must also remain on the plan. The key issue here is whether her father passed before or after his required beginning date, and knowing that requires his age at death, whether he was still working at death, and whether he was a 5% or more owner of the company. These facts are needed to know if he passed before or after his required beginning date.
If he passed prior to that date, she may be locked into the 5 year rule under the plan provisions, and that certainly will not be tax efficient. If he passed after his RBD, she can take life expectancy distributions, but must make up the missing years and may have to pay the 50% excess accumulation penalty for the prior years missed. Stretching the distributions as long as possible is the most tax efficient because the funds remaining in the plan have longer to generate tax deferred earnings. She can also convert the plan to an inherited (not owned) Roth IRA if she wishes and it is to her benefit, but taxes would be due on the conversion, and RMDs from the inherited Roth would also be required.
Permalink Submitted by Anonymous (not verified) on Fri, 2009-07-03 18:06
I am also curious what the 401K Admin/Custodian had to say in all those years about RMD. Or are they pretty much hands off: “We have no responsibility”
pmk
Permalink Submitted by Alan Spross on Sat, 2009-07-04 04:08
Anthony,
You were correct until the following IRS letter ruling was issued as explained in last year’s article by Ed following:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch613061-…
I would also add that a PLR is not binding for other taxpayers, but if there is enough similarity, it is worth the effort to act as if it were. In addition, there is no harm in even asking for the waiver of the 50% excess accumulation tax using the procedure recommended on p 6 of the Inst for Form 5329 (reasonable cause cited for failure to take earlier RMDs).
However, the original post referenced a 401k and NOT an IRA account. The above letter ruling applied to an IRA, so we are probably projecting too much to start applying it to an employer plan. That is why we really need to know whether employee passed before or after the RBD. If after, then the plans provided for life expectancy RMDs, but if before the RBD, then the plan provisions prevail, and that could either the 5 year rule or life expectancy on plans that have been amended. If the plan still indicates the 5 year rule or a deadline for election, it is too late to change it now.
pmk,
You raise a good question here. I am trying to locate any IRS release specifying employer plan requirements in communicating RMD info to either employees or beneficiaries. If they failed to meet a regulation, there may be some recourse. Will post back if I find anything.
Permalink Submitted by Joseph Arsenault on Mon, 2009-07-06 17:54
I know there are requirements (guidelines in Reg. 1.408-8) pursuant to notices Notice 2002-27 and Notice 2003-3 for IRAs (not including Roth or Beneficiary IRAs).
These do not apply to employer sponsored plans however.
If you find anything about requirements for employer sponsored plans, please post.
-J
Permalink Submitted by mk foss on Mon, 2009-07-06 20:59
Plan sponsors are required by Sec 402(f) to provide explanations of income tax consequences from qualified plans. Sec 6652(i) provides for penalties if the explanation is not provided at all or is late. Notice 2002-3 is the Safe Harbor Explanation that IRS has provided to meet the requirements. I believe the final section of the explanation is for beneficiaries.