Can we stretch a 401k or IRA before distributions have begun
I read in your books that an IRA/401k could only be ‘stretched’ if RMDs had actually begun. If not, then the beneficiary needed to take out all the funds within a 5 year period after the date of death. Is this true?
Permalink Submitted by Alan Spross on Fri, 2011-11-04 19:09
The 5 year rule only applies if the IRA owner passes prior to the required beginning date. If owner passes later, then the IRA can always be stretched over what would have been the decedent’s remaining life expectancy.
In addition, under PLR 2008-11028, the IRS allowed a beneficiary who had not taken annual RMDs and would otherwise be subject to the 5 year rule, to make up the delinquent annual RMDs, pay the penalty for the delinquent years, and then proceed to take RMDs over the beneficiary’ s life expectancy. It is not clear how many years the IRS would allow the beneficiary to make up those RMDs, but unless the beneficiary is very young the penalty would be prohibitive to go back more than perhaps 5 years.
There are additional actions available to prolong the life of an IRA, such as leaving the IRA to a younger spouse or other very young beneficiary. A younger spouse could avoid RMDs until the decedent would have reached 70.5 OR they can assume ownership and delay RMDs until the surviving spouse reaches 70.5. These tools push back the date that ANY RMDs must be taken out of the IRA.
Of course, the IRA will last longer if no one takes any discretionery distributions before RMDs begin, and once they begin they limit distributions to only the RMD amount. RMDs can also be avoided by converting an owned TIRA to a Roth IRA. Taxes will be due, but the Roth IRA has NO RMD requirement of the owner or surviving spouse who assumes ownership.