Inherited 401(k) and Waiver Procedure

Submitted by Eric Smith on Tue, 2016-01-12 21:17

I realize this question has been discussed in several other posts, but would appreciate your advice on the unique facts with which I’m dealing.

Client’s parent died in 2002 when client was 20 years old. Client inherited parent’s 401(k) worth around $60,000 as a nonspouse beneficiary and has not taken any RMDs since. Plan sponsor failed to notify client of any RMD responsibility. Client’s parent was in mid-forties, and, of course, had not begun RMDs.

I would be interested in recommendations on three fronts:

1) Is it still worth trying to stretch the client’s RMDs given how much time has lapsed since they should have started (12/31/2003) and acknowledging that penalty waiver is not certain?

2) If the client takes a lump sum distribution, under the 5-year rule, should a Form 5329 be filed for each year since the date on which the lump sum distribution failed to take place? The 5-year rule would have required a full distribution by 12/31/2007, so is a Form 5329 required for each subsequent year?

3) If the client takes the lump sum distribution in 2016, would you recommend filing Form 5329 as a stand alone form for previous years now as opposed to waiting until early 2017 when the 2016 return is filed reporting income from the distribution?



Submitted by Alan - IRA critic on Tue, 2016-01-12 22:59

  1. Not worth the effort. The 5 year rule will apply here, so the 401k should have been drained by the end of 2007. The plan sponsor may also be subject to penalties for failing to make distributions to the client.
  2. The client should take the lump sum distribution and file the 5329 requesting a penalty waiver on a 2007 5329 since the plan should have been drained at that time according to the 5329 Inst. No additional 5329 forms should be needed. 
  3.  The 2007 5329 should be filed with a 1040X ASAP after the lump sum distribution has been taken. so the waiver request can include a copy of the distribution statement. SInce the plan did not distribute an RMD and since this is a 401k and not an IRA, the client could use that information as his reasonable cause for the waiver.
  4. The 2016 tax return will include the taxable distribution, but no other mention of the RMD situation should be needed with that return. The 5329 is essentially treated as a separate return, but sending it with a 1040 X provides a place to state the waiver request. 

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