Deceased spouse 401k to beneficial IRA. RMD’s?
40 year old client’s spouse passed this year. She left a 401k of which he is sole beneficiary.
If he sets up an IRA in her name; DECEASED; FBO (client’s name), can he still treat the new beneficial IRA as hers? Would he have to start taking RMD’s?
We would like to mitigate or eliminate any taxes due in this year and still maintain his spousal beneficiary privileges.
Is there a better way to accomplish his objectives?
Thank you for your input.
Permalink Submitted by Lee Applebaum on Mon, 2013-09-16 20:55
Why would you want to open an inherited IRA when he can just roll her 401k into his IRA as a spouse and defer any RMDs’s until 70.5?
Permalink Submitted by Alan - IRA critic on Mon, 2013-09-16 22:08
Client could establish an inherited IRA under which no RMDs would be required until the year deceased spouse would have reached 70.5. However, if he needs funds at anytime before he is 59.5, he can tap the IRA without penalty. Therefore, the decision regarding the rollover date should consider the ages of both spouses for best results.
Permalink Submitted by Bob Modesti on Tue, 2013-09-17 00:14
How should the new account be titled? In response to the prior question, the thinking is that a deaceased spouse’s 401(k) or IRA can always be transferred into the surviving spouse’s IRA. Once done, you can’t go back the other direction. If it was simply the deceased spouse’s IRA, I know that the surviving spouse can treat it as there own without changing the titling. Assuming the surviving spouse wants to treat her 401(k) as his own but change custodians or investments, would he be able to transfer funds without changing the titling on the account?
Permalink Submitted by Alan - IRA critic on Tue, 2013-09-17 03:16
Yes, he could transfer an inherited IRA to a different custodian. It should be titled showing the decedent’s name and beneficiaries name in the order preferred by the new custodian. Note that if the surviving spouse FAILS to take an RMD required as beneficiary of the account, he defaults automatically to ownership status. Once that happens, the title should be changed to conform to the new IRA status.
Permalink Submitted by Bob Modesti on Tue, 2013-09-17 18:59
In a previous reply, you stated: “Client could establish an inherited IRA under which no RMDs would be required until the year deceased spouse would have reached 70.5. However, if he needs funds at anytime before he is 59.5, he can tap the IRA without penalty.”You also stated:”Note that if the surviving spouse FAILS to take an RMD required as beneficiary of the account, he defaults automatically to ownership status.”Just to be absolutley clear, how can he ‘establish an inherited IRA under which no RMDs would be required…” and “…he can tap the IRA without penalty”? I want to be crystal clear. I would not want him to make a mis-step here.
Permalink Submitted by Alan - IRA critic on Tue, 2013-09-17 20:43
Before decedent would have reached 70.5, a sole spouse beneficiary has NO RMD requirement. Therefore, during this period there is no way to default to ownership. But if beneficiary needs funds, optional withdrawals are penalty free because this is still an inherited IRA under which all distributions are coded “4” on the 1099R. 4 is the code for death distributions. You are correct that once the status is changed to ownership, the owner cannot go back to inherited status.