Inherited 401K?
I have a client and his Dad passed away in 2008. His dad left him a 401K. T Rowe Price renamed the 401K in the son’s name. T Rowe has told him he could keep it that way for 5 years. They have not sent him any RMDs. This sounds really screwed up to me. I am thinking I should roll it into an inherited IRA and start taking out RMDs right away. Any suggestions on how to treat this or course of action?
Thanks
Permalink Submitted by Alan Spross on Mon, 2012-07-16 23:48
Technically, the plan provisions determine what the client’s options are. It is also critical to know if his Dad passed prior to his RBD, but he probably did or the 5 year rule would not apply. Notice 2007-7 allowed a non spouse inherited plan to be transferred to an inherited IRA, but this had to be done by the end of the year following employee’s death to disregard a mandatory 5 year rule in the plan. Since that date has passed, the plan provisions will determine if the 5 year rule must apply of if life expectancy can be used.
You can transfer it to an inherited IRA (or even an inherited Roth IRA), but the IRA RMD options would still be determined by the 401k plan provisions since the deadline was missed. If the 5 year rule was the only option in the plan, the account must be drained by 12/31/2014 since 2009 does not count as a year due to RMD waivers for 2009. Otherwise, the client could probably use PLR 2008 11028 to restore life expectancy by making up all the life expectancy RMDs starting with 2010. The downside of doing that is the PLR required payment of the penalty 50% tax for each of these prior years. If client is young enough and/or account is large enough, it may be worth it to do that.
Here is article on PLR 2008 11028:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…