Mis-characterized rollover?
I recieved a phone call this morning from a woman in Medford, Oregon. Her husband died in Septemeber of 2009 at the age of 66 and left behind a small 401(k) for about 75k. She was listed as the beneficiary of the 401(k) plan. Her age is currently 54. She is withdrawing $500.00 per month and not only paying taxes on the withdrawal, but also an early distribuion penalty.
She obatined advise from a local RFP who sold her a VA in the form of a Traditional IRA.
Question: Could she have had the 401(k) plan characterized as an Inherited IRA and avoided the early distribution penalty. If so, can this be corrected.
Please help.
Anthony
Permalink Submitted by Alan Spross on Mon, 2012-02-20 18:56
I assume the 401k has already been rolled into her own IRA, in which she purchased the VA. If so, a bad move and it cannot be reversed. Once ownership has been assumed there is no way to return to inherited status under which distributions would have been free of penalty.
While she still had the inherited 401k plan, she could have had it rolled into an inherited IRA or taken distributions from the 401k plan directly. That is what the RFP should have done. Pretty basic error to make when the beneficiary is under 59.5 and needs to take distributions.
Permalink Submitted by Anthony Lehrer on Mon, 2012-02-20 19:45
Thank you for the quick reply – I am only thankful that I attended Ed’s two day training last year in Phoenix and did not give this advise myself. I was unsure about any opportunity to correct the mistake. Thanks for the clarification.
Anthony