Spouse Inherited IRA and 401k
I have a client, age 52, who inherited an IRA and a 401k from her husband who died this year at age 52. I would like to preserve her opportunity to be able to withdraw funds prior to age 59 1/2 without incurring the 10% early withdrawal penalty.
First, can the 401k be rolled into an Inherited IRA? The 401k documents give the option for rolling into a Traditional IRA but not specifically an Inherited IRA.
Second, the mutual fund comapny that currently has custody of her husband’s IRA says that if she does not take ownership of the IRA and chooses the option to delay RMDs until the husband would have been 70 1/2 that she would not be able to take any distributions until he would have been 70 1/2; essentially locking the account for 18 years. I believe they are wrong as it is my understanding that the spouse may delay distributions until then but is able to take penalty free distributions at any time prior to age 59 1/2. After age 59 1/2 she would assume the IRA as her own. Am I correct?
Permalink Submitted by Joseph Arsenault on Fri, 2010-11-19 19:41
1- Yes the funds can be rolled over to an inherited IRA. Just title the new IRA as such (decedent, FBO spouse) and maintain the inherited IRA status. Custodians are required to allow a Direct Rollover for non-spouse beneficiaries to inherited accounts so there shouldn’t be an issue. There may be a special instruction area.
2- I am not sure what your saying the custodian said, but don’t rely on retail advice.. The spouse will take RMDs until she converts the IRA to an owner IRA in her own name. Once she does this she will start taking RMDs in the first year she is 70 1/2. Hopefully this answers your questions.
You have the right idea, keep the IRA as inherited until 59 1/2 so there is no 10% penalty and just take the RMDs until then (since she is going to take money anyways). Then at 60 essentially re-designate the account as an owner IRA and have flexibility of not needing RMDs until 70 1/2. You already understand that if you make the IRA an owner IRA now the 10% penalty will come back.
Permalink Submitted by Alan Spross on Fri, 2010-11-19 21:18
With respect to either inherited IRA, a sole surviving spouse does not have to take any RMDs until the year her husband would have reached 70.5. However, this does NOT mean that she cannot take any discretionery distributions she wants, and they would be penalty free death distributions (Box 7 Code of 4). But as you indicated, she should roll over the account into her own IRA upon reaching 59.5.
There must have been some misunderstanding over what the fund firm said, it is so outlandish.
Permalink Submitted by Joseph Arsenault on Fri, 2010-11-19 21:32
Alan’s clarification should warrant a re-word of how I answered you so it is not confusing. On number 2, I should have clarified for you that RMDs are taken if needed, and with her husband being so young, that would not be the case. Sorry if I create confusion there, thanks Alan.