401K to Estate IRA to …

Submitted by Elizabeth Rae on Tue, 2019-04-23 19:25

I have hit a brick wall with finding a solution to my 401K situation. My father passed away without naming beneficiaries on his company-sponsored 401K account. Upon notification of his death, the bank which administered the 401K plan transferred the 401K to an Estate IRA account. Per my father’s will, my sister and I are the two beneficiaries of his assets. My sister and I do not want to take a full disbursement of the account; we’d rather continue taking the RMDs to stretch out the funds for as long as possible (my father was 72 when he passed away). We would like to close out Probate, but have been told we cannot do so as long as there is an Estate asset – the Estate IRA. However, the bank will not agree to split the Estate IRA account and transfer it to Beneficiary IRA accounts for my sister and myself without a PLR reference recommended by our lawyer.

I have seen several PLRs that indicate moving an Estate IRA to Beneficiary IRAs is allowed. However, the bank has stated that the PLR we referenced (PLR 2006-46025) is not applicable because the original account in that example was an IRA, not a 401K. In that instance, it went from an Owner’s IRA account to an Estate IRA account to being divided into Beneficiary IRA accounts. I subsequently found a PLR for a 401K that was transferred to an Estate IRA account to a Beneficiary IRA account, but the beneficiary was a Spouse and not children (PLR 2018-21008).

Does anyone have a PLR reference or citation that I can share with my lawyer and the bank, that fits this situation? Any help would be much appreciated!



Submitted by Alan - IRA critic on Tue, 2019-04-23 19:59

  • This won’t be pleasant to read. While leaving all retirement accounts to an estate should be avoided, when an IRA is inherited the executor can assign the inherited IRA to the beneficiaries under the will. However, this is not possible when an estate inherits a qualified plan such as a 401k. Per Sec 402(c)(11)  an inherited 401k can ONLY be transferred to an inherited IRA of a designated beneficiary or a qualified trust. Such a transfer cannot be made for an estate beneficiary since estates are not considered designated beneficiaries, therefore the bank made a serious error here since their transfer to an IRA was not an eligible rollover distribution. Further, the IRA custodian also failed to reject the transfer, which they should have done. As a failed rollover, the 401k plan has unfortunately been distributed and is taxable. However, to put this into context almost all such plans that are aware of these rules are going to make a lump sum distribution to the estate anyway. It is just a question of WHEN they make the distribution.
  • This direct rollover restriction is also stated in QA 11 of Notice 2007-7 before it was added to the tax code.
  • Since this is very clear, there is not likely to be a PLR authorizing such a transfer. No telling what the bank is going to do once they realize their error, but most likely would revise the 1099R to show a taxable distribution rather than a direct rollover coded G.
  • As a result of the disallowed direct rollover, the inherited IRA is an excess contribution and the inherited IRA should be distributed as a corrective distribution of an excess contribution. To avoid double taxation the IRA custodian must understand the 1099R coding for the distribution and only the earnings on this disallowed rollover should be taxable. Therefore, you should talk to the 401k administrator first to determine what they plan to do, then contact the IRA custodian and ask to speak to a dept head. Having already accepted this rollover it appears the IRA custodian is not up to speed on these issues.

Submitted by Elizabeth Rae on Wed, 2019-04-24 14:08

You’re right…that was not pleasant to read!  But thank you for the advice and data points.  One follow up, if you don’t mind.  What is it that makes the fundamental treatment of a 401k different than an IRA?

Submitted by Alan - IRA critic on Wed, 2019-04-24 16:05

Mostly, it is the historical provisions in employer plans requiring distributions to the (estate) beneficiary coupled with the tax code changes made in the Pension Protection Act of 2006 in which Congress chose not to allow or require direct rollovers to inherited IRAs for estate beneficiaries. Most likely, this is what the plan sponsors lobbied for. Further, since many estates end up in litigation, IRA custodians probably did not want to get caught up in beneficiary scabbles. That said, I have never seen an analysis of the exact causes for this policy which probably results from a combination of sources.

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