spousal IRA options at 39 years old
I have a client who is inheriting a 401k plan from her deceased husband worth 300K. Can I split this into IRAs, one retitled into her name for her eventual retirement and the second into an inherited IRA where she can take distributions for living expenses without incuring the early withdrawal penalty? She would like some income but not off of the whole 300k.
Thank you for your help.
Permalink Submitted by Alan Spross on Fri, 2009-10-23 18:40
You have several options here:
1) First, I would check to see if there is any NUA potential from highly appreciated employer stock in the plan. If so, a lump sum distribution must be taken to tap this potential, and taking an LSD has other implications.
2) If the 401k distribution options provide for flexible distributions, they can be taken directly from the plan with no penalty or
3) The entire amount could be transferred to an inherited IRA from which she could withdraw without penalty; there are no RMDs required until the year her husband would have reached 70.5; she can assume ownership of this inherited IRA anytime she wishes, typically at 59.5 when she would no longer have a penalty for withdrawals from her own IRA. There could be some custodian resistance to establishing inherited IRA, since this is based on a letter ruling only ( PLR 2004 50057), but you should be able to find one with a little extra effort.
4) After setting up the inherited IRA, any portion she wishes could be withdrawn and rolled over to her own IRA. However, if she ends up needing any of those funds, then a 72t plan will be needed to tap it without penalty. These plans do not work well when they must last over a decade due to their inflexibility and stringent requirements to avoid retroactive penalties and interest.
5) NUA with an LSD could be combined with the establishment of an inherited IRA and/or rollover of part to an owned IRA. A cost basis quote from the plan should be secured. NUA is not particularly attractive unless the cost basis is under 30% of the FMV of the shares unless a large distribution is needed right away.
Permalink Submitted by Anonymous (not verified) on Fri, 2009-10-23 18:43
As far as I remember she can not roll any portion to an Inherited IRA, although I have seen several PLRs allowing it. Some IRA custodians might even allow her to, just based on that. I worked at a company that could be convinced…..
Alternatively, I can think of only two options:
1. Keep it in the 401K. Distributions are penalty-free. Investment choices are probably limited though.
2. Roll over to regular IRA and decide on SEPP option. Income is probably limited due to relatively small balance and needs to continue for 20 years (I calculate about 1K/month using the whole balance and some basic assumptions).
http://www.72t.net/Sepp/Irc72tCalculator.aspx
There may be some “exotic” Roth conversion strategy available, where the converted money is available in five years, but I don’t think you want to consider that.
pmk