401k Rollover FROM Employer to Spouse
Client has passed away with a 401k intact at employer.
1) What are the rules for spouse to take / receive 401k to “Inherited” / IRA?
2) What is the EXACT language that needs to be on the paperwork and the check to the insurance company.
3) Anything else I need to know.
Thanks,
Wm. Spar
Permalink Submitted by Alan Spross on Fri, 2010-04-30 19:46
1) Spouse has a choice here, and their age is a major factor. If the survivor rolls the 401k into THEIR OWN IRA before 59.5, they will then have an early withdrawal penalty on distributions prior to 59.5. But if the survivor is older than 59.5, generally it is best to roll it by direct rollover into their own IRA or even a Roth IRA if that is to their advantage. If survivor rolls to an inherited IRA as authorized by IRS PLR 2004 50057, they can take penalty free distributions until they are 59.5 and can then assume ownership of that inherited IRA.
2) The check should be made out to the new IRA custodian (insurance co, broker, mutual fund, etc) FBO the surviving spouse IRA if they are assuming ownership, or FBO surviving spouse inherited IRA as beneficiary of (deceased spouse) if they want to continue as beneficiary instead of owner. If you are using an insurance company, they should be able to advise the titling format that works best with their processing systems. But on ANY inherited IRA, the name of the decedent needs to be shown on the registration as well as the name of the survivor. It does not matter which order they appear on the registration. The registration on the account should match up with the name shown on the check.
3) If taken in beneficiary form, RMDs for the surviving spouse do not have to begin until the year the decedent would have reached 70.5. If rolled over to own name, RMDs are based on the age of the survivor.
4) Investigate if the 401k contain any highly appreciated employer stock that can be used for NUA (net unrealized appreciation). If so, those shares can go to a taxable account and when they are sold, the taxes on the gains in the plan are at the lower LT cap gains rate. Tax on the cost basis when purchased in the 401k plan are due for the year distributed in a qualifying lump sum distribution. The other plan assets can go to an IRA by direct rollover and avoid current taxation. This option is complex enough and is even MORE complex if there are after tax contributions in the plan. Even without NUA, the amount of any after tax contributions should be determined because they can be rolled over to an IRA and an 8606 filed to document the new IRA basis. There are also Roth conversion opportunities here.
5) Main thing is to gather all the info needed to determine what combination of options is the best given the client’s age and needs and the characteristics of the inherited 401k assets. Then determine what works best and the best order in which to proceed. The process is much simpler if NUA is eliminated from consideration and all the 401k funds are pre tax.