Non-Spouse 401k/403b/457b RMD Options After Missing Dec. 31 2019 Deadlines
401k/403b/457b owner died in 2018 with complex estate. Beneficiaries were non-spouse conduit trusts with all requirements met to be a designated beneficiary. The account wasn’t separated across the trusts until 2020 and no distributions were made in 2019. Plan documents default to 5-year RMD unless life expectancy RMD is taken by Dec. 31, 2019. However, plan documents allow for rollover to inherited IRA until the end of the 5th year.
So, is it possible to rollover the accounts into inherited IRAs and use the life expectancy/stretch RMD schedule via taking the 2019 RMD distribution late plus penalty? Or will the 401K/403B/457B plan documents and required distribution schedule still “carry over” to the inherited IRAs?
Is there anyway to “save” the stretch with these accounts or are they going to be 5-year schedules?
The only “clear” answer I can find regarding this is this quote from https://www.kitces.com/blog/fix-rmd-missed-forgotten-miscalculated-corrective-action-form-5329-penalty/ but it is not sourced as to how they drew the conclusion that a rollover would still be subject to the plans distribution rules.
(Note: While some employer-sponsored retirement plans use the stretch as the default distribution schedule for non-spouse beneficiaries, many require such beneficiaries to distribute assets much sooner, often within five years. In such instances, the beneficiary can take timely (directly) roll the funds to an inherited IRA that allows the stretch (by the end of the year after the year of death). If, however, the funds remain in the plan past December 31st of the year following the year of the plan participant’s death, then the beneficiary is subject to the plan’s distributions rules (even if the funds are later moved to a stretch-allowing account).
My other resources have thus far been:
– https://irahelp.com/slottreport/bene-missed-first-rmd
– https://www.kitces.com/blog/new-guidance-on-fixing-a-botched-ira-stretch-after-its-too-late/
– https://www.kitces.com/blog/non-spouse-beneficiary-stretch-of-inherited-ira-and-401k-or-403b-employer-retirement-plans/
Edit: This thread from this forum seems to indicate it may be locked into the 5-year distribution schedule but looking to confirm given this situation. https://irahelp.com/forum-post/24121-inhertited-401k-ira-rollover
Is there perhaps anyway to ask the IRS for an exemption since the beneficiaries didn’t have access to the accounts prior to 12/31/2019?
Permalink Submitted by Alan - IRA critic on Sun, 2021-03-28 20:33
If the plan document specified the 5 year rule as the RMD method for deaths prior to RBD, and the 12/31 of the following year deadline to do a direct rollover to an inherited IRA is missed, the 5 year rule is locked in per Notice 2007-7. While there is no harm in requesting an exception from the IRS, it is probably a long shot that the IRS would grant one, and it may take a long time to even hear from the IRS.
In addition to the above deadline for distribution from the qualified plan, the trusts would also not be qualified if the trust info was not submitted to the plans by 10/31/2019. It is not clear if this deadline was met either.
With either of the above deadlines missed, the same 5 year rule would apply. Direct rollovers could still be done to separate inherited IRAs in the first 4 years if the trust provisions allow distribution out of trust, but that would not affect the 5 year rule requirement. Due to 2020 RMD waiver, the inherited plan or inherited IRAs would have to be drained by 12/31/2024. The plan provision limiting direct rollovers to inherited IRAs after 5 years seems contrary to IRS rules because the 5th year is a 100% RMD year and no amount of an RMD is rollover eligible.