Inherited 401k
My mother passed in August (age 80) and left a 401k (still in employer plan) to her 5 children as beneficiaries (no spouse). A few questions.
No RMD was taken before her death. Does it have to be taken before we distribute or can each beneficiary take 1/5 th?
Do all 5 beneficiaries need to set up inherited IRA’s before distribution?
We would all like to stretch this money as long as we can. Thanks for the help
Permalink Submitted by Alan Spross on Tue, 2011-10-11 01:26
No RMD was taken before her death. Does it have to be taken before we distribute or can each beneficiary take 1/5 th?
The 2011 RMD must be taken before the transfers to inherited TIRA or Roth IRAs. Plan accounting may require it to be distributed equally to each beneficiary, but if they are willing to adjust the share amounts, then any of the beneficiaries that wants the extra distributions could take them in lieu of the others. That would obviously require the plan to alter the remaining share amounts from the original 20% each.
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Do all 5 beneficiaries need to set up inherited IRA’s before distribution?
This is not required, but things would be simpler if they did. But the plan would probably be willing to transfer each of the beneficiary shares at different times based on when they each establish the beneficiary IRA accounts to receive the transfers. Remember that direct transfer must be used here, no indirect rollovers are allowed.
Remember that each non spouse beneficiary has the option to convert all or part of their share to an inherited Roth IRA (it will still require RMDs). This cannot be done with inherited IRAs, but can be done with inherited qualified plans. Also, any after tax contributions remaining in the plan should be split equally. That would produce some basis as documented on Form 8606 for each inherited IRA, or reduce the taxable amount for a Roth conversion. Finally, if there is highly appreciated employer shares eligible for NUA in the plan, this presents yet another option to deal with, and if the plan has both after tax amounts and appreciated stock, the options become quite complex, especially if the beneficiaries arrive at different decisions.
Permalink Submitted by Anonymous (not verified) on Wed, 2011-11-16 23:50
How is the RMD calculated. Her life expectancy or beneficiaries?
Permalink Submitted by Alan Spross on Thu, 2011-11-17 01:02
The 2011 RMD is what your mother’s RMD would have been based on the 12/31/2010 plan balance.
The 2012 RMDs can be based on each beneficiary’s single life expectancy (Table I in Pub 590) using each’s share of the 12/31/2011 balance. To be able to use their own life expectancies, the beneficiaries need to establish separate accounts no later than 12/31/2012.
Permalink Submitted by Anonymous (not verified) on Thu, 2011-11-17 03:13
Thanks. The plan admin is telling us that we must use our own expectancy for the 2011 RMD. I appreciate your help.