457 plan inherited by minors, rolling over to inherited IRA

Submitted by Greg Schumacher on Sat, 2015-12-12 22:54

Our kids were named as beneficiaries on the 457 plan of their grandmother who passed away in 2014. We are in process of obtaining guardianship of their estates so that we can roll the money over into an inherited / stretch IRA for them and take the required minimum distribution for each by year end.

Unfortunately we are down to the wire due in part to bad information we’ve received (which has fortunately only wasted time and didn’t result in irreparable mistakes). The courts (Orange County, California) require that we either post bond or put the money into blocked accounts, and we elected to go the bond route to keep things simple for this first year. However, we found out that sureties don’t like to do bond for estates, so we’re considering posting the bond via a cash deposit with the court (if they support that), or trying to get in asap next week to switch to going the blocked account route.

If we go the blocked account route, we’d plan to set up two blocked accounts for each minor like at Capital One 360 (so they’re earning more than 0%) – one IRA savings account and one normal savings account (for the RMDs to be deposited into), but don’t know what complications we might run into and don’t want to make a misstep so close to the deadline. For example, might there be issues with them supporting blocked accounts or taking out the RMD from a blocked account (I’m guessing we’d need a court order which we’d try to get at the same time we go back to court).

I’m hoping if anyone is able to call out any possible issues they see or else confirm they don’t see any issues with our plans, that would be very much appreciated.

Thanks!



Submitted by Bruce Steiner on Sat, 2015-12-12 23:40

  • Some states permit persons holding assets payable to a minor to make payment to a custodian under the Uniform Transfers to Minors Act.  Some states have a limit on the amount so payable.  You may want to check the UTMA statutes of the states where the decedent, the 457 plan, the minors, and the proposed custodians are located to see if this is possible, and if so, whether the 457 plan will cooperate.
  • Another possibility, if the 457 plan will permit it, is to wait until the minors reach 18, and then to ask the IRS to waive the penalty for the missed distributions.  Even if the IRS doesn’t waive the penalty, the amount involved won’t be very much, since the required distributions in the early years are small.  This may be more practical if the minors are close to 18 than if they’re very young.


Submitted by Greg Schumacher on Sun, 2015-12-13 04:06

From what we’ve been told it’s unfortunately not eligible to do as UTMA.  We asked in court anyways and the judge gave us a scolding that that wasn’t a valid option =).That’s an interesting idea regarding keeping it in the 457 plan (assuming they’d permit it like you said).  A nice benefit of that would be that it could stay invested in the stock market rather than being forced into a interest-bearing account which has very low yield right now.  The gains by staying in it might outweigh any RMD penalties even if the IRS didn’t waive them.  However, to answer your question, the kids are young (5 and 7) and more importantly, it sounds like if we don’t take the RMD, it will convert to a 5-year-distribution option instead of the lifetime stretch option which wouldn’t be desirable:I read that “You have to take out your 1st distribution in the next calendar year by Dec. 31 of the calendar year following the year that the decedent died. If you miss that date, you default back to the 5-year rule,” (per http://www.bankrate.com/finance/retirement/ways-to-go-wrong-with-inherited-ira-4.aspx).Thoughts?



Submitted by Alan - IRA critic on Sun, 2015-12-13 00:17

How old was grandmother when she passed?  What are the ages of the children as of 12/31 of this year?  What is the rough value of the inherited account. Since time is very short now, the RMD is the least of your concerns, and as bsteiner pointed out in his second point, this may turn out to be the most viable solution. It also avoids kiddie tax issues AND the IRS will almost always waive the penalty for late RMDs since the court proceedings provide a valid “reasonable cause” for the delay. However, not knowing the 457b default RMD options, the most critical issue right now is to get the direct rollovers done by year end, PARTICULARLY if grandmother passed prior to her RBD. Please advise on those ages. Finally, beyond no distributions allowed, are there other issues with a blocked account?



Submitted by Greg Schumacher on Sun, 2015-12-13 04:12

She was 63 when she passed.  Their ages will be 5 and 7 as of 12/31 of this year.  The rough value is $100k.  Beyond no distributions being allowed, I’m not aware of any issues with a blocked account other than perhaps it being a less common thing that could delay things with the financial institutions.  Btw, I also just now posted a reply to bsteiner regarding keeping the money in the 457 and my concerns.  It’d be great if we could just convert the current 457 to an inherited IRA and keep it in there as is if that were a viable option.



Submitted by Alan - IRA critic on Mon, 2015-12-14 02:41

  • Sounds like this plan requires an “election” by the beneficiary by the end of this month to elect either LE or the 5 year rule. See QA 4  C) Elections here: https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-3
  • Has the plan accepted you as financial guardian such that you could make the LE election now, and receive the first LE RMD? That would protect the LE stretch and later on a direct rollover to an inherited IRA for each could be done and then you would have more control including not taking the RMD in some future year and paying the excise tax if you wanted (would avoid possible kiddie tax in any given year). But to avoid the 5 year rule it looks like the first RMD must come out this month. I would confirm all this with the plan administrator.
  • If the plan had a mandatory 5 year rule, then 12/31 would be the deadline to do a direct rollover to avoid the 5 year rule. However, as you described it, the 5 year rule is not a requirement if LE is elected in time.


Submitted by Greg Schumacher on Mon, 2015-12-14 06:36

Unfortunately the court hasn’t appointed my wife financial guardian yet.  I think we’re very close to that though and hopefully we’ll have that wrapped up soon.  



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