Recently widowed, 401(k), year of death RMD

Submitted by Tom Belding on Tue, 2023-02-28 20:55

I’d greatly appreciate any input on this situation w/ a recently (1/28/23) widowed client:

She and her deceased husband, both in their late ’70s, were both retired from the Federal Reserve, where they were covered under the FRB’s Thrift Plan – essentially a 401(k), aka “SmartBenefits.” Presumably in accord w/ plan guidelines, promptly after his demise his accumulated benefit was transferred into a new account in her name, as the designated beneficiary.

The form letter advising her of this indicates: “lf the participant passed away on or after his or her required beginning date, you are required to receive minimum distributions by December 31 of the year following the year in which the participant passed away.”

Since he had obviously started taking RMDs, would she not be required to take his full year of death RMD this year?

Tom

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Permalink Submitted by Alan - IRA critic on Tue, 2023-02-28 21:17

You are correct. She must complete husband’s 2023 year of death RMD if he did not.
Normally, she would be advised to do a direct rollover to her own IRA and then take distributions starting in 2024 using the Uniform Table. She should not continue as a beneficiary after 2023 since the single life table would produce higher RMDs.
That said, since she should be familiar with this 401k, having her own account there. Sec 327 of the Secure 2.0 Act will allow qualified plans to treat a sole spouse beneficiary as the owner for the first time, starting in 2024. This will put qualified plans on par with IRA accounts with respect to surviving spouses. Next year she could elect to be treated as the owner of the inherited plan. Not sure if they would permit it to be combined with her own such plan. Notifications she might receive from the plan would not yet anticipate this change.
Or since 2023 will be their last year to file jointly, she might wish to convert an incremental amount of her plan to a Roth IRA, since her tax rates will go up in 2024 filing single. There is time to explore this option.