Can an IRA and Deferred Annuity be Grouped Together for RMD Purposes?

By Joe Cicchinelli and Beverly DeVeny
Follow Me on Twitter: @theslottreport

In this week’s Slott Report Mailbag, we answer questions on IRA rollovers with pre-tax and after-tax money, 401(k) plans without a beneficiary, and if an IRA and deferred annuity can be grouped together for RMD purposes. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.
I have a rollover IRA with roughly $200k in it, of which $30k is after-tax. Can I reverse rollover the $170k pre-tax dollars into my employer’s 401(k) plan (it does accept reverse rollovers)? Can I then do a back-door Roth IRA with the remaining $30k of after-tax dollars?

Answer:
Assuming your employer retirement plan accepts rollovers, you can only roll the pre-tax dollars into it. If you roll over the $170K pre-tax funds to your 401(k), then you will be left with only after-tax money in your IRA which can be converted tax-free. This assumes you have no other traditional, SEP or SIMPLE IRAs.

2.
My brother recently passed away and he had a 401(k) (Caterpillar Tractor). Unfortunately, he didn’t name a beneficiary. I am his brother and the last remaining kin in his family. I’m also the Administrator of his Estate and I’m also the legal beneficiary. I’ve already handled everything under probate related to his estate, except this 401(k) plan. I’ve kept the estate open until this 401(k) issue is resolved. I understand that I must decide how to handle the distributions by the year after his passing. The Administrators of his 401(k) told me that I must either take a lump sum or 5-year distribution and it must go thru the estate. I’m also told that I may be able to roll this over into an inherited IRA.

My questions are:
A. Do the assets in this account get taxed at the Estate rate or my personal ordinary tax rate?
B. Can you explain the mechanism that must be followed in order to get the assets from the plan to the estate and then to me personally.

Answer:
You should check with a tax professional about the taxation of the 401(k) distributions when they go to an estate.

Unfortunately, you cannot roll this over to an inherited IRA. Only a designated beneficiary that is named on the beneficiary form, such as an individual or a look-through trust, can rollover 401(k) funds to an inherited IRA. An estate is never a designated beneficiary. The estate will be limited to the options allowed in the plan. If the estate takes a lump sum distribution, it will be eligible for any tax saving benefits the plan participant would be entitled to such as 10-year averaging or net unrealized appreciation.

3.
Can an IRA and deferred annuity be grouped together for RMD purposes and the withdrawal be paid out of only one account?

Answer:
An IRA and a nonqualified annuity cannot be grouped together for RMD purposes. Only IRA (qualified) annuities, that have not been annuitized, and IRAs that you own or have inherited from the same person can be grouped together for RMDs.