money sitting w 401k custodian
Ive got a client who has a 401k just sitting there even though he is no longer employed there and he says he is going to keep it where it is…he has a wife but no kids and about 250k in there. What are the reprecautions if he would die if any
Zach
Permalink Submitted by Alan Spross on Fri, 2009-10-02 22:48
That depends mostly on his beneficiary designation on the account, and on whether his state is a common law or community property state.
In the most likely situation where his wife is the sole beneficiary, she can roll the account over to her own IRA, convert it to a Roth IRA, or maintain the account in inherited status so that she could take distributions without penalty. Her RMDs would depend on his age at death relative to his RBD and what she does with the account. She should also name her own succesor beneficiary on the account ASAP, and on any succeeding account.
She also has a right to any NUA potential in the account due to his death, and that should be explored if there is highly appreciated employer stock shares in the 401k. If she rolls it to an IRA, any NUA potential is forfeited. She also needs to be aware of any after tax balance in the account which can be distributed tax free. Since the account will be inherited, there is no early withdrawal penalty. But if she rolls it to an IRA under age 59.5, she will then have a penalty for distributions.
If there are creditor problems, in a few states the ERISA protected 401k will have better creditor protection than an IRA would have.
Generally, the client has better investment options and beneficiary flexbility if he rolls the account over to a traditional IRA, Roth IRA or some combination. But this should not be done until checking on the creditor situation and any NUA potential for employer stock.