Can Successor Beneficiary of 401k use Stretch (their Life Expectancy) while leaving in plan?

Submitted by Michele Von Hoven on Thu, 2018-08-02 22:08

1.Can a Successor Beneficiary of 401k use their Life Expectancy while leaving in the 401k or must they transfer to properly titled Inherited IRA? And must that be done by end of year following owner’s death? (I think successor bene must do RMD’s based on original beneficiarie’s L.E.)?
2. Can a beneficiary of 401k use their Life Expectancy while leaving in the 401k or must they transfer to properly titled Inherited IRA ?
3. Isn’t it a requirement of all qualified plan that they must allow trustee to trustee transfers?
Thanks



Submitted by Alan - IRA critic on Fri, 2018-08-03 00:49

  1. Yes, the successor beneficiary must continue the RMD schedule of the original beneficiary. There is no new stretch.  There is also no option for the successor beneficiary to do a direct rollover to an inherited IRA, only the original designated beneficiary or qualified trust can do such a direct rollover. The 401k plan will either allow the RMD schedule to play out or the plan might have a provision to require a lump sum distribution once the first beneficiary passes. When a surviving spouse happens to be the original designated beneficiary, they should not leave the inherited plan in place because it results in a bad result for their named successor beneficiary. The surviving spouse should either roll over to their own IRA or to an inherited IRA from which they can eventually elect ownership and name their own beneficiary (eg a child) which will allow that beneficiary to get a stretch based on their own life expectancy.  
  2. They can do either. As stated above, only the original designated beneficiary or qualified trust can do a direct rollover to an inherited IRA. A successor beneficiary cannot. An estate beneficiary cannot do a direct rollover to an inherited IRA in any situation. That is why leaving a 401k to your estate is even worse than leaving an IRA to your estate.
  3. This is called a direct rollover, which is a reported distribution and rollover. While a direct rollover is physically executed as a transfer, it is not considered as a transfer because it must be reported on Form 1099R and your tax return. A 401k plan MUST allow a direct rollover to an IRA for a designated beneficiary or qualified trust (not an estate). A successor beneficiary is NOT a designated beneficiary and therefore not allowed to do a direct rollover.
  4. All somewhat confusing including some terminology used by the IRS.

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