Inherited 401k Rollover issue
Hello All! I am hoping for some help on this one…
A client’s mother passed away in 2021 at the age of 77. Our client inherited multiple retirement plans from her mother. We have two issues:
- The client received a check made payable to her after some confusing calls she took from the plan custodian. 100% of the check is after-tax funds from her mother’s 401k.
- Our custodian is telling us the funds cannot be deposited into her Beneficiary Roth IRA because the funds are not made payable directly to our custodian (the check is made payable directly to the client, which would make this an indirect rollover). They are saying indirect rollovers are not eligible to be deposited to the Beneficiary Roth IRA (even though we are within the 60 day window).
- The retirement plan custodian will not reissue the check as a direct rollover to the Beneficiary Roth IRA.
Has anyone experienced this before and do you have any solutions? I feel like we could just deposit the check to the beneficiary Roth IRA and the client would receive a 1099-R from the plan showing the full non-taxable amount and a 5498 from our custodian showing the rollover contribution into the Beneficiary Roth IRA… but out custodian says it is ineligible.
- The second issue is SECURE Act related … IRS Notice 2024-35 waives RMDs. The 401k custodian, for the Pre-tax 401k inherited by our client, is telling us the client must take an RMD for 2023 and 2024 before we can do the direct rollover… which is typically correct. However, we think they should be waived for this year.
Are we correct that the RMDs should be waived and we should be able to just roll the full amount into the Traditional Beneficiary IRA?
Thanks in advance!
Permalink Submitted by Alan - IRA critic on Wed, 2024-06-12 18:43
Custodian is correct. A non spouse beneficiary cannot roll over any distribution, and apparently incorrectly requested a distribution rather than a direct transfer for any IRA or a direct rollover from any inherited qualified plan. The 1099R will be coded 4 (death benefit) which will make it clear that the distribution is not eligible for rollover (unless it was made to a spouse).
Is this a different plan that did not make a distribution to client? If a distribution check was issued, Secure Act RMD rules become irrelevant as the check will cover the RMD. However, if there are plans for which no distribution check has been issued, and the Secure Act 10 year rule applies, you are correct that the 2022-2024 beneficiary RMDs have been waived and that should be made clear to the plan before requesting a direct rollover. Nonetheless, if a distribution is made even if not a proper RMD, it still cannot be rolled over by a non spouse beneficiary.