401k with no beneficiary

Submitted by Travis Tsukayama on Thu, 2023-12-07 02:59

Working with an older husband/wife client. Their daughter passed away this year in her 60s. Daughter had a 401k with no listed beneficiaries. 401k provider advised parents (who are handling daughter’s estate) that the only option for distribution of the funds was to receive a check made payable to daughter’s estate since no beneficiaries were listed.

Parents then created an inherited IRA titled under the estate of the daughter, where the funds were then deposited into.

The question now is on the required distribution schedule. My initial thought is that the 5-year distribution rule applies since the daughter’s estate is beneficiary. Will there not be any RMDs since the daughter was below RBD age?

Parents CPA is saying there is no distribution schedule for an estate beneficiary. The amount of the 401k distribution will be fully taxable to the estate in the year the distribution is made unless the IRA amount is distributed in the same year to the estate beneficiaries at their personal tax rates. Any insight would be much appreciated as I determine how to proceed with helping the parents.



Submitted by Alan - IRA critic on Thu, 2023-12-07 03:51

  • The CPA is correct. As is the case with most inherited qualified plans with an estate beneficiary, the plan will normally issue a taxable lump sum distribution to the estate. Such a distribution is not eligible for rollover to any form of retirement plan, and having done so, an excess IRA contribution was created that must be removed from the inherited IRA. Further, a direct rollover to an inherited IRA is not allowed except for designated beneficiaries, and the plan was aware of that. Once the inherited IRA funds are back in the estate, the proceeds can be passed out of the estate on Form K 1 to the beneficiaries of the estate, either those listed in the will or if no will then under state intestate rules. This will allow the beneficiaries of the estate to report the income and pay taxes at their personal tax rates, not the higher rates that apply to estates.
  • This illustrates why the consequences of an estate inheriting a qualified plan are greater than an estate inheriting an IRA. With the qualified plan, there is no way to transfer the funds into an inherited IRA from which distributions can be spread over multiple years. In this particular case, it would have been over 5 years.

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