Inherited IRA Withdrawals
John (63) dies and leaves his 401k account to his son John Jr. (33). Are the following statements true?
1) John Jr. can take the entire amount out of the 401k pay tax on the income but not be assessed the 10% early withdrawal penalty because death is always a valid exception to that penalty.
2) John Jr. can set up an inherited IRA in the name of John Sr. and roll the 401k amount into that account. He can then at any time take any distribution and it will never be subject to the 10% penalty (understanding that he will be forced to take at least some minimum distributions starting the year after John Sr.’s death or distribute the whole account within 5 years).
Thanks in advance for the confirmation.
Permalink Submitted by Al Fry on Mon, 2009-11-02 22:27
True, however the inherited IRA is in Jr’s name, not Sr. Preferred wording would be “John Jr. as bene of John Sr.” The IRS would like the name that is tied to the SSN listed first, not at the end.
Permalink Submitted by Alan Spross on Tue, 2009-11-03 02:59
Also, note that the transfer to an inherited IRA is optional until plan years beginning after 12/31/09. It is then mandatory that the plan provide the direct rollover. The inherited QRP can also be converted to an inherited ROTH IRA (income limits apply until 2010). This is the only chance for these funds to be converted since once they reside in an inherited TIRA, they cannot be converted. RMDs apply to both inherited TIRA or inherited Roth IRA accounts for non spouses.