Beneficiary of a Pension non-spousal – 7 years later
I have a client who has just discovered she is the next of kin for her father’s pension. The problem is that Dad died seven years ago in 2017, and the pension company was never notified of his passing until recently. Dad had no beneficiary listed and was single/divorced from her mom years before. He was age 57 at his death. She is the only child, and the pension company said they could pay her a lump sum to an inherited IRA or payments over her life of 200 a month. Or a combination of those two. She is 38. If she rolls it into an inherited IRA, we are well past the five-year rule. What if she takes the lifetime income? Are there penalties or other things she needs to report going back to 2017? Will the IRS forgive the penalties?
Please help. I am just trying to help her with the best possible choice.
The household income is currently in the 22% tax bracket currently – 110K the account lump sum would be 115K
Permalink Submitted by Alan - IRA critic on Wed, 2024-07-03 20:12
As you describe this and because the plan seems to assume client is the beneficiary and the 5 year rule does not apply, it appears that this plan included default beneficiaries, probably first the spouse but if no spouse then the children. Otherwise, Dad’s estate would have inherited and the plan would be issuing a total distribution and there would have been no possibility of a direct rollover to an inherited IRA.
The plan provisions also determine if the 5 year rule applied or life expectancy distributions. If the beneficiary could have made an election, the deadline for that election has passed.
The plan must distribute late RMDs for past years regardless of the RMD method, and client can file a 5329 for each year to request waiver of the penalty, which will likely be granted by the IRS. If a direct rollover can be made to an inherited IRA, and annual stretch RMDs are taken starting in 2025, that would probably be a better solution than $200 a month, which will not buy anything much in 30 years when she retires, and she would not have access to the principal.