Inheriting a 401k as an older non-spouse
Here is the situation:
401k owner was 71, but would have turned 72 in 2021. Died in May, birthday in Sept. Worked up to day he passed.
Not married but lived with his significant other for more than 20 years. She is 6 mo’s older than he was.
*Account owner did not take an RMD from 401k in 2021 or ever for that matter, because he was still working (and had not turned 72 yet this year).
Acct owner passed. The 401k administrator said they would allow the non spouse beneficiary to leave the 401k account within the 401k plan and just changed account owner from him to her, and marked her/the account as beneficiary. I did not know this was allowed?
So we are wanting to make sure she does not have to take an RMD from this account yet this year?
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-15 23:07
SInce the 401k participant was still working, he passed prior to his RBD, and there is no year of death RMD required. The beneficiary is only the beneficial owner, and is not the participant. She holds the 401k as a non spouse beneficiary. Her first beneficiary RMD will be for 2022 and based on her attained age in 2022. The new RMD tables will apply to determining her RMD divisor in 2022 and beyond. Since she will now name her own beneficiary for the account, because some qualified plans require a lump sum payout when the beneficiary passes, she should consider a direct rollover to an inherited IRA, where her RMDs will be the same, but she will have better control of the account.
Since she inherited a 401k, she does have the option of doing a direct rollover to either an inherited TIRA or an inherited Roth IRA, or could split the amounts to each.
She should also determine if there is highly appreciated employer stock in the 401k on which she could utilize NUA and pay the lower LT CG rate when she sells those shares. If this is viable, she will need to take the LSD in 2022. The 2022 plan RMD will have to be distributed before any rollover out of the plan in 2022, however distribution of employer shares for NUA purposes would count toward the 2022 RMD.
With all these options, she should take her time to explore all of them before determining a plan of action or taking a distribution.