Best way to approach for simplicity and taxes

Submitted by Robert Witt on Wed, 2017-02-15 21:31

I have a prospect, Helmut who is 82 and lives in Florida. His wife passed away in 2016 at the age of 61.

Helmut has a 401(k) at a bank
Market value as of 12/31/16: $1,011,658.94
Divisor bank is using: 8.6

His wife has a 401(k) at a bank also
Market value as of 12/31/16 $1,110,542.58
Divisor bank is using: 23.3

Helmut also has a rollover IRA at Schwab with a Market value as of 12/31/16 $250,970.56

1. I believe the divisor the bank is using on Helmut should be 16.3 and not 8.6?

2. My understanding is that Helmut has to roll over the wife’s 401(k) into an IRA in his name or take a lump sum?

3. Any disadvantage (other than using the wrong divisor) to keeping Helmut’s 401(k) as is?



Submitted by Alan - IRA critic on Wed, 2017-02-15 22:14

  • Are you sure these accounts are 401ks?  If so, did they work for these banks? Were either of these accounts already inherited before his wife passed?
  • Helmut should have been using the joint life table for a spouse more than 10 years younger through 2016, but now he must revert to the Uniform Table. 8.6 makes no sense at all for 2017.
  • For the account inherited from his wife, if he wants to delay RMDs he can keep it in inherited status and will not have to take RMDs until the year she would have reached 70.5. If he rolls it over to his own IRA, he will have to take RMDs using his age at the end of 2017. If that is 82 his divisor will be 17.1, if 83 it will be 16.3. If he wants to avoid RMDs for awhile on the inherited account but the plan requires him to move it, he can do a direct rollover to an inherited IRA and still delay RMDs for 9 years.
  • No disadvantage in leaving the 401k in place as long as he can make investment changes as needed and the plan will let him name a successor beneficiary. But it is critical that he roll it over to his own IRA no later than the year before he will reach 70.5.  He will be 90 then so is there a way to make sure this gets done? If not his successor beneficiary will get almost no stretch at all.
  • If the plan is telling him he has to take a lump sum distribution, that needs to be investigated as they must offer him a direct rollover to an inherited IRA if they will not keep the account open. He needs to be sure no distribution check is issued or it will be a tax disaster.

Submitted by Ben Meyer on Thu, 2017-02-16 03:03

It may be a coincidence, but the divisor of 8.6 for Helmut is the number from the Single Life Table for a person at age 83 at the end of the year.  That would match Helmut’s age since he is now 82 early in the year, assuming his birthday has not yet occurred this year.  So somehow the plan custodian or recordkeeper might be treating this plan as an inherited plan with 2017 as Helmut’s first year with the account.  If further information is available, it may clarify the matter.

Submitted by Alan - IRA critic on Thu, 2017-02-16 04:47

If the 8.6 divisor went with the wife’s plan instead of Helmut’s it would indicate that they think Helmut must take a beneficiary RMD in 2017 based on age 83. However, that would not be correct if he was the sole beneficiary of the account, because his beneficiary RMDs do not start until wife would have reached 70.5. The reported info needs to be re verified, as it appears more than one issue exists here.

Submitted by Ben Meyer on Thu, 2017-02-16 13:54

  • As a further conjecture, the divisor of 23.3 is the same as the divisor from the Table II (Joint Life and Last Survivor Table) for a younger spouse of 63 and an older spouse of 83.  Depending on when the wife’s birthday occurs during the year, she may have been 63 by the end of 2017 if she hadn’t passed on.  
  • Then, to conjecture further, the second account looks like it could actually be Helmut’s plan, with a sole spouse beneficiary more than 10 years younger, and therefore using Table II.  If this is the case, Helmut should advise the plan of his wife’s passing and select a new beneficiary,  He will then use Table III (Uniform Life Table) for 2017 and thereafter, with the divisor for 2017 of 16.3.
  • Then, as Alan posted, Helmut will not need to take RMDs from his wife’s plan (actually the first plan in the posting) until the future year she would have turned 70.5. 
  • The above is all conjecture and would need to be verified before placing into effect, but it would seem to align with the facts presented.

Add new comment

Log in or register to post comments