Inherited 401(k) Beneficiary Misses Deadline for Transferring to Inherited IRA

Submitted by Betsy Ratashak-Vogel on Wed, 2020-05-06 21:59

Individual presents with a 401(k) inherited from mother who passed away in 2017. He is just now receiving paperwork in 2020 from the plan provider. It’s about $600k and there have been no RMDs distributed. He was named as a beneficiary and the decedent had not begun RMDs.

Can anyone confirm that he is subject to the five-year rule and cannot stretch because he missed the year-of-death plus one deadline to transfer to an Inherited IRA for lifetime RMDs?

Thanks!



Submitted by Alan - IRA critic on Wed, 2020-05-06 22:56

  • The plan provisions will determine whether he is stuck with the 5 year rule or can salvage life expectancy RMDs by making up the missed 2018 and 2019 beneficiary RMDs. A plan might include either method as the default method, and also might have a deadline for the beneficiary to make their own election. That deadline would have been 12/31/2018, and having been missed the beneficiary would fall under the plan default rules. If the beneficiary does a direct rollover to an inherited IRA, the method that would have applied to him if he left the funds in the 401k must also apply to the inherited IRA.
  • If the 5 year rule applies, the CARES Act results in not counting 2020, therefore the plan balance would have to be drained by 12/31/2023, so the taxes could be spread over 4 years (2020-2023) to control the top rate. In addition, a direct rollover to an inherited IRA can be done  of the entire balance before 2023.
  • If the life expectancy stretch is the plan default, then he needs to make up the 2018 and 2019 RMDs ASAP. A direct rollover can stlll be done to an inherited IRA in which the LE RMDs can resume in 2021. He could also do a direct rollover to an inherited Roth IRA if he chose to and continue the RMDs from the inherited Roth IRA. Or split the direct rollover in any fashion between inherited TIRA and inherited Roth IRA.
  • Therefore, the first thing to do after getting the plan re titled in beneficiary form is to ask what his RMD options are and how they were determined. He should be sure to ask this to a seasoned professional since staff of the administrator might not understand the IRS or plan requirements. 

Submitted by Betsy Ratashak-Vogel on Wed, 2020-05-06 23:51

Thanks for your input! Does he need to take his 2018 and 2019 RMDs before the direct transfer or can that wait until it’s in the new Inherited IRA?

Submitted by Alan - IRA critic on Thu, 2020-05-07 00:47

The plan should require that any life expectancy RMDs due under the plan through the end of 2019 will be distributed and not included in any direct rollover to an inherited IRA.

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