Estate as beneficiary
Hello!
I need some guidance. Client’s father died in 2019 and the 401k was left to the estate. The estate has one beneficiary, his daughter. She has not taken out any distributions, as Fidelity “told her” that she had to wait 5 years for the funds to come out.
From my understanding, she has to distribute the full amount out within 5 years…I believe she was told incorrect information.
Can she roll this to an inherited IRA, allowing her to close the estate and take out distributions over the remaining 3 years? Thus, lowering the tax rate on the distributions?
Or does she have to keep the estate open and have the account completely distributed at the end of five years? Thus being taxed at the much higher estate tax rate?
Thank you!
TC
Permalink Submitted by Alan - IRA critic on Mon, 2021-05-24 23:13
She must have completely misunderstood what Fidelity stated. However, she is very lucky that did not make a lump sum distribution to the estate, which is the usual practice.
If father passed prior to RBD, the 5 year rule applies, which means that the 401k must be drained by the end of 2025. 2020 does not count due to the RMD waiver for 2020. If father passed on or after the RBD, annual RMDs can be distributed over his remaining life expectancy, except for 2020.
Since an estate is not a designated beneficiary, a direct rollover to an inherited IRA is not allowed, so the trustee cannot assign the 401k balance to an inherited IRA.
Again, it is surprising that she is not facing a total distribution, but to take advanatage of that, the estate will need to stay open to receive distributions including RMDs.