Spouse 401k Bene… Now what???
A client’s husband passed away and she was the beneficiary of his 401k. The 401k has since been retitled in her name, still as a 401k with her husband’s former company. What are her options now and what are tax implications of each option to keep in mind? Can she roll this into her existing IRA or should she be opening a beneficiary IRA?
Advice most appreciated!
Permalink Submitted by Alan Spross on Mon, 2010-01-25 19:56
There are plenty of options, but the best choice cannot be made without a thorough analysis of her needs, age, assets etc.
1) Take penalty free distributions from the 401k; RMDs need not start until husband would have reached 70.5
2) Transfer to a beneficiary IRA still showing husband’s name; can take penalty free distributions and no RMD required until husband would have reached 70.5
3) Transfer to her own IRA; distributions subject to penalty until she reaches 59.5; RMDs begin when she reaches 70.5; pre age 59.5 penalty can be avoided by establishing a 72t (SEPP) plan, but this can be risky and restrictive, so is best avoided unless there are compelling reasons for it.
4) Do either 2 of 3 above with an appropriate portion going to an inherited Roth IRA or owned Roth IRA; this would be a taxable conversion subject to the two year deferral on taxes for 2010 conversions.
5) Do one of the above in conjunction with a transfer of any highly appreciated employer stock shares to a taxable account if there is NUA potential; this option requires a lump sum distribution of the entire plan in the same calendar year. Benefit is lower LT cap gain rates on the appreciation (NUA).
6) Determine how much of the 401k balance is from after tax contributions. Knowing this will affect the above decisions with a Roth conversion more advisable the higher the portion of after tax contributions in the plan.
Finally, if she has any creditor problems, a 401k always has the best creditor protection, an owned IRA the next best, and an inherited IRA the least. All are affected by state laws as well as the federal bankruptcy Act of 2005.
The main thing is to take your time to do the analysis since many of these choices cannot be reversed once undertaken. A Roth conversion is the exception as it can be recharacterized. She also needs to name her successor beneficiary ASAP.