Inhertited 401(k) to IRA Rollover
Good Morning,
Guidance with the followning is appreciated
FACTS:
401(k) participant, 45, died in 2013
Mom, age 72 sole primary beneficiary
401(k)recordkeeper told mom she didnt need to take a withdrawal for 5-years under “5-year payout rule” although mom wanted to stretch.
Mom(after chatting with a knowlegable FA) rolled over the 401(k) to an inherited IRA on 12/23/2014 with the actual rollover dollars being deposted in January 2015.
Mom missed taking her first RMD year after death (12/31/2014)
Question(s)
Does mom have the option to take the missed 2014 RMD retroactively? Followed by completing Form 5329 with an explanation stating her case?
Is she “locked in” to the 5-year rule
Does the fact the rollover started in 2014 and was not completed until 2015 have any impact?
Thank you
Permalink Submitted by Alan - IRA critic on Fri, 2015-01-16 15:58
Per Notice 2007-7, the distribution to the inherited IRA must be done no later than 12/31 of the year following the year of death if the beneficiary is to be allowed to use life expectancy RMDs. So if there is no 1099R issued by the plan indicating that the balance was not distributed in 2014, the mother is stuck with the 5 year rule if the plan specifies as such. If the distribution was done in 2015 and NO RMD was taken out of the distribution, that is another good indication that the 5 year rule does apply to this plan. Of course, if there is any question about the plan provisions, copies of the plan document can be requested for review. Some plans allow the beneficiary to make an election by 12/31 if LE is to apply, so if no election was made or offered, that is another indication that the 5 year rule will apply not only to the plan but also to the inherited IRA receiving the late rollover. Accordingly, the first thing to look for is a 1099R by the end of this month. If no 1099R, then the plan provisions might be verified, but so far it looks like the 5 year rule probably applies here. If so, then there are no RMDs for any particular year, but the beneficiary might still want to take distributions over this period so that the entire distribution is not taxable in a single year.
Permalink Submitted by ShipsnGiggles on Tue, 2015-01-20 19:26
found here http://www.irs.gov/pub/irs-tege/se_021307.pdfIf I am understanding correctly – a non-spoue beneficieay that inherits a 401(k) account from an owner who died prior to their RBD can roll the assets to an inherited IRA (the special rule) as long the rollover is done in the year following the account owner death. Further the special rule applies even if the plan requires the 5-year payout. In the scenario described above the account owner passed in 2013 – mom the non-spouse beneficiary should have taken her initial RMD by 12/31/2014 commencing the stretch. Unfortunately the 401(k) recordkeeper refused. Although I havent seen the SPD – my assumption is the plan defauled to the 5-year rule. Even if this is the case – wouldn’t the plan be required to to process Mom’s first RMD? Your assistance and guidance is sincerely appreciated. Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2015-01-20 20:02
You are correct. Under the special rule, the beneficiary should advise the plan that they are opting to apply LE RMDs under the special rule and the plan would then distribute the 2014 LE RMD directly to the beneficiary. I suspect that many of these direct rollovers completed by the deadline included the LE RMD in the rollover because the beneficiary did not specify what they were doing to the plan administrator. The plan administrator would then transfer the entire balance assuming that was OK under the 5 year rule. This is probably what happened here. Had the direct rollover been completed in 2014 even without the 2014 LE RMD, the beneficiary should make up the 2014 RMD from the IRA, request waiver of the penalty on a 5329 and just proceed with LE RMDs from the IRA from that point. The problem here is if no 1099R is issued, it will be clear that the direct rollover missed the deadline altogether and therefore the 5 year rule would apply to the IRA, which I assume holds no other money besides this 401k direct rollover.
Permalink Submitted by ShipsnGiggles on Wed, 2015-01-21 20:07
your response you mention a 1099 not being generated. “If no 1099R, then the plan provisions might be verified, but so far it looks like the 5 year rule probably applies here”.Are you saying a 1099 would not be generated in my scenario if the plan defaulted to the 5-year rule? Or the same question asked in another way – Using the same fact pattern above assuming the 5-year payout rule – is a 1099 generated when moving 401(k) to a non-spouse inherited IRA?
Permalink Submitted by Alan - IRA critic on Wed, 2015-01-21 20:30
A 1099R is always generated for the year of any distribution from a qualified plan, even if rolled over. Therefore, the lack of a 1099R for 2014 will mean that the plan considers the distribution to be made in 2015. In addition, the fact that the entire amount was rolled over without an annual RMD being distributed indicates that the plan considers the 5 year rule to apply in which no annual RMDs are required. But what we do not know for sure is whether the 5 year rule applies because it is mandatory or because the plan did not receive a request electing life expectancy under the special rule, or received it too late to act on by distributing the 2014 annual RMD by year end. Note there is still 2 weeks left in which a 1099R for 2014 could be received.