Spouse inherits her husband’s 401K
Spouse inherits her husband’s 401K; I understand that she has the ability to roll it into her own IRA.
I have two questions:
I understand the advantages of rolling it into an IRA, what are the disadvantages to rolling it to an IRA or doesn’t she have a choice in doing so??
Does she have to start taking RMDs now; her husband was 55 years of age when passing, or can she wait until she reaches her age of RMDs??
Permalink Submitted by Alan Spross on Mon, 2011-08-22 19:54
There are lots of choices:
1) She could leave the account with the company in beneficiary form. She does not have to start RMDs until the year he would have reached 70.5. Or she could take penalty free distributions as needed if the plan allows partial distributions.
2) She could roll the account to an inherited TIRA account, under which there would also be no RMDs until he would have reached 70.5, but she could withdraw penalty free. She could then assume ownership of the IRA when she reaches 59.5.
3) She could roll it to her own IRA now or anytime, but distributions would be penalized until she reaches 59.5
4) She could convert directly to a Roth IRA or roll it to a TIRA and then convert if she wanted to.
Disadvantages of rolling to OWNED IRA:
1) Will lose ERISA creditor protection; most states fully protect IRAs from creditors, but some do not
2) Distributions will be penalized until she reaches 59.5
3) If she is alot older, her own RMDs would have to start sooner than if she left it inherited form (when husband would have reached 70.5).
4) If there is a high % of after tax contributions in the plan, commingling it with her own IRA could accelerate taxes on distributions taken vrs taking distributions directly from the inherited 401k
5) If plan includes highly appreciated employer stock (NUA), rolling those shares to an IRA would forfeit use of the NUA tax break
Many of these issues may not apply to her, but they should be considered.