Beneficiary RMD
A 78 year old retired person passed away in April and he had NOT yet taken his RMD for 2010. He had 401k assets in an old company plan and assets in an IRA account. His two children are listed as primary beneficiary and the 401k allows for assets to be transferred to an Inherited IRA. I have two questions.
1. Does the deceased’s RMD have to be taken before the assets are transferred to the Inherited IRAs?
2. Can the assets in the 401k and IRA be combined to one Inherited IRA for each of the children? So each child would only have to have 1 Inherited IRA.
Thank you!
Permalink Submitted by Alan Spross on Wed, 2010-05-05 22:17
1. Does the deceased’s RMD have to be taken before the assets are transferred to the Inherited IRAs?
Yes.
2. Can the assets in the 401k and IRA be combined to one Inherited IRA for each of the children? So each child would only have to have 1 Inherited IRA.
Yes, since both are inherited from the same decedent. However, an exception applies if the RMD divisor is different for the IRA souce funds from that of the 401k source funds. This can happen if separate accounts are not created by the deadline for one of the inherited accounts, but the deadline is met for the other inherited account. Also, note that the non spouse inherited 401k can be converted to an inherited Roth IRA, but the inherited TIRA cannot be converted.
The children may also want to check out any NUA potential in the 401k account due to highly appreciated employer stock shares. NUA is lost if the shares are ever transferred to an IRA of any type. Distribution of NUA shares will also apply toward the RMD for 2010 for the decedent.
You actually have a very complex situation if the inherited 401k has both after tax contributions and NUA potential. Then one beneficiary wants to split their share between a distribution of shares to a taxable account and a Roth conversion to inherited Roth, and the other beneficiary just wants a transfer of their entire share to an inherited TIRA.
The beneficiaries should be reminded that they cannot take a distribution and roll it over. All changes of custodian must be done by direct trustee transfer or they have created a taxable event and lost future deferral benefits.
Permalink Submitted by Jonathan Sard on Thu, 2010-05-06 12:36
Alan, as usual, your replies are very detailed and helpful! I truly can’t thank you enough for what you provide!