Spousal 401K vs INH IRA

Submitted by Peter Tobin on Mon, 2022-12-05 16:53

Deceased spouse (59) 2017 had 401K renamed to husband (72) so RMD’s start 2030. For investment advice moving funds to an ‘investment managed Inherited IRA’ (at same brokerage). Any difference (Tax wise) for a spousal 401k (renamed) and an Inherited IRA WHEN in 2029 convert to ‘surviving spouses own IRA’ and thus the Uniform Lifetime Table which produces a lower RMD than the Single Life Expectancy Table.
Net, net is is “OK” to convert the 401K to an Inherited IRA now?



Submitted by Alan - IRA critic on Mon, 2022-12-05 18:38

  • Maybe. There are a couple possible issues here that may or may not surface. FIrst, the beneficiary needs to confirm with the 401k plan that the plan provisions did not result in the 5 year rule applying. If the 5 year rule applies, the plan would require a lump sum distribution in 2023, and while a direct rollover could be done in 2022 (last possible year so time is running out), the 5 year rule would transfer to the IRA, so nothing would be gained by doing the direct rollover. While the 5 year rule is possible, it’s more likely that it does not apply.
  • If the 401k uses LE as the default, then it would also allow deferral of beneficiary RMDs until the deceased participant would have reached 72. Those RMD provisions would also transfer to an inherited IRA, but because the IRS Regs do not clearly authorize a direct rollover to an inherited IRA (only to an owned IRA) for a spouse, we have to rely on PLR 2004 50057 which authorized a direct rollover for a spousal beneficiary to an inherited IRA. With some plans, this might result in a problem completing the direct rollover.

Submitted by Peter Tobin on Mon, 2022-12-05 21:39

Alan – Thank you for such a prompt response.Since I am planning those 401k funds of my wife’s to be ‘professionally managed elsewhere’ ‘ (due to the poor performance of the 401k advisors); the ‘new advisors’ ‘required/requested’ moving the funds to an Inherited IRA. I just wanted to be sure NO FUTURE TAX ISSUE would arise since funds are now in an inherited IRA rather than a 401k plan.I’ll contact the 401k to follow up on your pointed out concerns.By the way, what is the “LE as default”?  The 401k is currently deferred RMD til 2030.So just need to be sure CAN DO a Direct Rollover to an Inherited IRA, correct?And no ‘5 year’ rule exists.Thanks again.

Submitted by Alan - IRA critic on Mon, 2022-12-05 22:31

  • That’s right. “LE by default” refers to the usual plan rules for deaths prior to RBD. Most plans specify LE (life expectancy of beneficiary from Table I), some plans require the beneficiary to make an election between LE and the 5 year rule by the end of the following year, and a very few plans only provide for the 5 year rule. If this is one of them, they should have advised the beneficiary by now so the beneficiary would know that RMDs are deferred due to the participant not having reached 72 rather than deferred due to the 5 year rule that also does not have annual RMDs in years 1-4. 
  • Note that once the funds are successfully directly rolled to an inherited IRA for surviving spouse, and if beneficiary RMDs would start in 2030, if the beneficiary RMD is missed in 2030, then the inherited IRA is deemed to have defaulted to ownership status at the end of 2030. The 2030 RMD would be late, but would be calculated from the Uniform Table.
  • On another subject, inherited 401k holdings should be checked to determine if there is any highly appreciated employer shares in the account, that would be eligible for NUA. This option is erased with a direct rollover to an IRA. NUA is taxed at the lower LTcap gain rates after shares are distributed to a taxable account.

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