Non spousal 403b and 401k
Usually the 401k/403b withheld 20% taxes for non-spouses and then sent the balance to the children/other and they had to pay taxes on their whole share. There were no other options for them.
Did the Secure Act change this:
- Is it still correct that kids/other cannot rollover their parents 401k/403b into an inherited IRA (only from an IRA or Roth)?
- do the kids/other have any other options like a 5yr deferral from the 401k/403b plan or keep in it the 401k and take RMD’s?
Thank you
Douglas
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-15 14:13
Non spouse beneficiaries of these plans have been able to request direct rollovers to inherited IRAs since 2007. In 2010 it became mandatory for such plans to provide these direct rollovers to either an inherited TIRA or an inherited Roth IRA. A direct rollover is required, a 60 day rollover is not allowed. The Secure Act did not change this requirement, but did change the RMD rules.
The 401k or 403b plan may require the 10 year rule to apply for deaths prior to RBD just like the prior 5 year rule. But if the direct rollover was done by the end of the year following the year of death, in the past the beneficiary could substitute life expectancy distributions for the 5 year rule in the inherited IRA. It now appears that the Secure Act Regs have terminated this option, and the inherited IRA must now follow the same RMD rules that applied to non spouse beneficiaries in the 401k or 403b. If the participant passed after RBD, then life expectancy would apply from either the plan or from the inherited IRA.
Tax withholding only applies to distributions directly to the beneficiaries and such distributions to non spouse beneficiaries are never eligible for rollover. Despite this, the Secure Act Regs state that the withholding rate of 20% that applies to eligible rollover distributions also applies to distributions to beneficiaries.
Permalink Submitted by Douglas Bauerband on Fri, 2025-01-17 14:27
You stated the above:
Tax withholding only applies to distributions directly to the beneficiaries and such distributions to non spouse beneficiaries are never eligible for rollover (meaning no 60 day rollover, corrcct?). Despite this, the Secure Act Regs state that the withholding rate of 20% that applies to eligible rollover distributions also applies to distributions to beneficiaries. (So, no matter if the non-spouse beny does a transfer to an inherited IRA, the company will still withhold the 20%?)
Permalink Submitted by Alan - IRA critic on Fri, 2025-01-17 18:39
No. Withholding is only required on a distribution directly to the owner or beneficiary, not on a direct rollover to an inherited IRA or a direct transfer from one IRA to another.
And no 60 day rollover is allowed for a distribution to a non spouse beneficiary.