401k and IRA have “estate” as bene – Secure Act 10yr rule

Submitted by Wendy Mommaerts on Wed, 2022-10-26 15:44

1) We have a client who passed away in 2022 at the age of 62. Client had an IRA and a 401k account in which he listed his “estate” as his bene. I would assume that the rule for the beneficiary is that they would have to place these funds into an IRA in the estate name and would then have to withdraw the funds by the end of the 5th yr of our clients death…12/31/2027?

2) Our client also had a Roth IRA with the “estate” listed as the bene. I would assume a Roth IRA would need to be established in the estate name and the funds also withdrawn by the end of the 5th yr of the client death…12/31/2027?



Submitted by Alan - IRA critic on Wed, 2022-10-26 20:06

  • Leaving plans to the estate is not advisable, but is much worse for an inherited qualified plan (401k)  than an inherited IRA. Most all qualified plans will require a lump sum distribution to the estate within a short time, and there is no way to transfer the balance to an inherited IRA since only designated beneficiaries are eligible for direct rollovers. And the plan will not be willing to hold the account for more than a few months at most, and while the IRS rules indicate that the 5 year rule applies, the plan will not provide that option. Therefore, the estate executor can expect to receive a lump sum check for the 401k balance. Income to the estate can probably be passed through the estate to the estate beneficiaries on a K 1 form.
  • SInce the IRA assets are already in an IRA, lump sum distributions can be avoided. The executor can usually assign the inherited IRAs out of the estate to the estate beneficiaries, often before any distributions are required. While the 5 year rule still applies, these estate beneficiaries can determine how much is taken out each year, can manage their own inherited TIRA and Roth IRAs, but still have to drain these inherited IRAs by 12/31/2027.

Submitted by Wendy Mommaerts on Thu, 2022-10-27 14:11

I’m assuming these would have a registration type as inherited IRA’s and not TIRAs?

Submitted by Alan - IRA critic on Thu, 2022-10-27 15:02

Yes, these are inherited TIRAs, being a TIRA that has been inherited. They would be titled ” (beneficiary name) as beneficiary of (decedent’s name)”.

Submitted by Wendy Mommaerts on Tue, 2022-11-01 13:29

If the 401k is required to be issued in a lump sum. Can the beneficiary do a 60 day rollover into an inherited IRA FBO of the estate and from there the beneficiary can w/draw funds as needed?

Submitted by Alan - IRA critic on Tue, 2022-11-01 15:10

No, not unless the estate beneficiary is a surviving spouse and gets a PLR allowing for a spousal rollover. Such a ruling is more likely if the surviving spouse is the executor and sole beneficiary of the estate. Not sure if there are any custodians who would accept a spousal rollover based on past PLRs. All non spouse estate beneficiaries are out of luck.

Submitted by Wendy Mommaerts on Thu, 2022-12-22 17:36

Ok so what ended up transpiring is the 401k plan documents allowed to have the 401k account transfer into an “estate of clients name” where the executor is allowed to keep the funds within the 401k plan. My question is, I know the account will need to be emptied by 12/31/2027, how do we determine the annual RMDs? Can the executor determine the amount they want to withdraw each year or will they be on an RMD table?Also, to confirm, the IRA and Roth were moved to an Estate inherited IRA and an Estate inherited Roth IRA where these funds also have to be withdrawn by 12/31/2027. Does the executor decide on the amount taken each year and not have to follow a RMD table? 

Submitted by Alan - IRA critic on Thu, 2022-12-22 18:07

  • This is a very accomodating 401k plan, as most plans will require a full distribution within a short time instead of waiting 5 years. There are no annual RMDs in the 5 year rule, just a full distribution required by 12/31/2027. However, the executor is probably allowed partial distributions to the estate as needed, but this should be confirmed by the 401k administrator. The estate will probably pass through these distributions to the estate beneficiaries on a K-1 and the beneficiaries will report the income and pay tax at their individual rates. 
  • The inherited IRAs are subject to the same 5 year rule as the 401k as described above. However, since the funds are already in an IRA, the executor can usually assign them out of the estate to separate inherited IRA accounts (TIRA and Roth) for each estate beneficiary. That would not change the 5 year rule, just would remove these accounts from the estate and place them under full control of the beneficiaries. That said, since this 401k plan is already unique in allowing the plan to stay open, the executor might ask the plan if it will accept assignment to the individuals, which would allow the estate to close and not have to remain open for 5 years. Unlikely that the 401k would allow this, but no harm in asking. 
  • Again, there is no way to move the inherited 401k balance to inherited IRAs because there were no designated beneficiaries named on the plan. And there are no annual RMDs for any of these accounts, but executor may still want to take annual distributions of some amount from the non Roth accounts to avoid a tax spike in 2027.

Submitted by Chris Zuck on Wed, 2022-10-26 22:09

Husband passed 1-2-22 and wife passed 1-16-22.  He listed her as the primary bene and no contingents.  I know the IRA can go to an estate IRA, can the distributions be over 10 year to the estate and is there a way to divide it amongst the beneficaries (all kids) and let them pay the tax rather than keeping the estate open for 10 year?

Submitted by ufleming on Thu, 2022-11-03 20:34

The executor or personal representative should work carefully with their estate attorney to be complaint with both state specific probate laws and liquidity needs. Potential headwinds are: 1) The executor successfully completes the trustee transfers and lacks liquidity to pay the attorney, tax professional filing the returns, creditors and themselves (this scenario is relevant if fees and liabilities can’t be addressed by other assets) and 2) Laws relevant to probate- some states require the executor to deposit all funds into an estate account. In regards to the Roth which is likely the only asset that can be transferred, some or all of the account is going to be tax-free so if it must be liquidated and placed in the estate account it may not be devastating.

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