Retirement plans

Submitted by Eric Gilbert on Wed, 2015-03-25 14:14

Hi, I’m hoping to get some clarification. My brother recently passed away and his company 401k is administered with Vanguard. I called VG and they stated that he did not list any beneficiaries. Am I correct that if he had listed benes those benes would have been able to open inherited IRA accounts and request the funds directly from Vanguard? Am I also correct that approximately 20% of the total assets will be lost at withdrawal due to this bene oversight?

Lastly, once the assets are in an Estate account (most likely with a bank and less the 20%), my assumption is that the administrator(s) of the Estate can send funds from the account but how are these distributions to be received by the heirs…still as Inherited IRA’s?

Thanks for your help!

Eric



Submitted by Jose Morales on Wed, 2015-03-25 17:51

You need to read the plan documents to determine exactly what their procedure is when no beneficiary is named.  There will be default provisions, such as having the estate be the default beneficiary.  If the estate is the default, then the executor should still be able to establish an inherited IRA and have the funds moved to the inherited IRA by direct rollover, thus avoiding the 20% withholding.  If the consequences of no beneficiary being named is that Vanguard required a lump sum distribution to the estate then avoiding the 20% withholding will not be possible without some type of intervention that can convince Vanguard to allow a direct rollover to an inherited IRA.

Submitted by David Mertz on Wed, 2015-03-25 18:23

A distribution made to the estate would not be eligible for rollover, so there would be no mandatory 20% withholding.

Submitted by Eric Gilbert on Wed, 2015-03-25 19:26

Thanks for replying but I’m still confused.  VG’s Beneficiary Designation form has two options: The first option (had my brother been married at the time he passed away) would be to select Box 1.  He was not married at that time (and no beneficiaries were listed on his plan) so the only other option is Box 2 for “Estate.”  Under this box, it states something to the effect that 20% will automatically be withheld when the distribution occurs.  According to the VG representative, the remaining balance would leave them to be sent directly to an account in the name of the Estate.  Both the withholding and the transfer of assets will be triggered by myself, as the administrator, by submitting to VG their Distribution form. Then, once the funds are at the bank (less the 20%), as the Administrator, I could distribute the assets like any other non qualified account. My assumption was that the 20% would take care of the gov’t and then the remainder would be distributed as if it were non qualified funds.  Is my thinking accurate or am I way off?  Thanks for your help!    

Submitted by Eric Gilbert on Thu, 2015-03-26 03:33

Thanks for replying but I’m still confused. VG’s Beneficiary Designation form has two options: The first option (had my brother been married at the time he passed away) would be to select Box 1. He was not married at that time (and no beneficiaries were listed on his plan) so the only other option is Box 2 for “Estate.” Under this box, it states something to the effect that 20% will automatically be withheld when the distribution occurs. According to the VG representative, the remaining balance would leave them to be sent directly to an account in the name of the Estate. Both the withholding and the transfer of assets will be triggered by myself, as the administrator, by submitting to VG their Distribution form. Then, once the funds are at the bank (less the 20%), as the Administrator, I could distribute the assets like any other non qualified account. My assumption was that the 20% would take care of the gov’t and then the remainder would be distributed as if it were non qualified funds. Is my thinking accurate or am I way off? Thanks for your help!

Submitted by Alan - IRA critic on Wed, 2015-03-25 18:35

Actually, a death benefit distribution to any person or entity other than a surviving spouse is not rollover eligible and mandatory withholding would therefore not apply. Any change of custodian can only be done by direct trustee transfer, and that is also the case if the executor assigns the inherited IRA to the beneficiary of the estate.

Submitted by Eric Gilbert on Thu, 2015-03-26 03:35

Thanks for replying but I’m still confused. VG’s Beneficiary Designation form has two options: The first option (had my brother been married at the time he passed away) would be to select Box 1. He was not married at that time (and no beneficiaries were listed on his plan) so the only other option is Box 2 for “Estate.” Under this box, it states something to the effect that 20% will automatically be withheld when the distribution occurs. According to the VG representative, the remaining balance would leave them to be sent directly to an account in the name of the Estate. Both the withholding and the transfer of assets will be triggered by myself, as the administrator, by submitting to VG their Distribution form. Then, once the funds are at the bank (less the 20%), as the Administrator, I could distribute the assets like any other non qualified account. My assumption was that the 20% would take care of the gov’t and then the remainder would be distributed as if it were non qualified funds. Is my thinking accurate or am I way off? Thanks for your help!

Submitted by Alan - IRA critic on Thu, 2015-03-26 04:33

This form has a major design flaw. 20% withholding only applies to eligible rollover distributions. The following is copied from the tax code Sec 402(c)(4):

(4)Eligible rollover distribution For purposes of this subsection, the term “eligible rollover distribution” means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust; except that such term shall not include—(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made— (i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or (ii) for a specified period of 10 years or more, (B) any distribution to the extent such distribution is required under section 401 (a)(9), and(C) any distribution which is made upon hardship of the employee. 

Note that the distribution must be to an EMPLOYEE. An estate is not an employee. There should be no 20% withholding applied to the distribution, which will result in a more complex estate 1041 to get the withholding transferred to the beneficiaries. Try calling VG and ask to speak to a technical supervisor on beneficiary distributions. Maybe they can tell you how to alter the form by eliminating the 20% portion in a way that your changes will not be ignored. 

Add new comment

Log in or register to post comments