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401K spouse survivor beneficiary

Forum|Forum|3 years ago
December 12, 2022
4 replies
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I have a client who is a spouse survivor beneficiary of her husband 401K. Her husband passed away 6 years ago. She inherited the 401k balance of $1M. Few days ago she got a check to distribute the full amount less withholding tax. She called the plan and they said they distributed the balance due to the 5-year rule. She had no ideas of the 5-year rule, thought that the plan was under her name and she could wait until 72 years old to take the RMD. Is there any way she can reverse the 5-year rule and select to take distributions based on her own life expectancy ? If so, what does she do with the distribution check ?

Thanks so much for your response.

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Best answer by qbteachmt

This is all very confused. For instance, you mention the 5-year rule, but the original owner died 6 years ago? 2017? What is the year of death? I believe the rule is to empty the account by the end of the 5th year after the year of the date of death, similar to how it reads for nonspouse:

"At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed."

And that should include rolling it to an Inherited IRA, then into her own IRA. That means now doing so by making up the withholding difference, depositing the gross. OR, pay taxes on the withholding as a partial distribution, of course.

Had the deceased spouse been taking RMDs, or reached that age? Did/has she continued that? He fell under the 70-year old rule. For any provision and reference you read, pay attention to if it is impacted by the SECURE Act, so you know if it falls under old or new rules.

You need to know specifics, and details, and what applies depending on the year in question. You mention she thought the plan was in her name, but "plan" doesn't apply. It's account that is important. Did she have it in a 401(k) account in her name, or as Beneficiary in his name? She could have rolled it into a Traditional IRA; talking about Roth is talking about a taxable conversion. 401(k) to Trad IRA is not a taxable event. She is not trying to reverse the 5-year rule. She is trying to know the options.

There are resources all over the web, such as:

https://www.investopedia.com/inherited-401-k-rules-to-follow-5425958

https://www.fool.com/retirement/plans/401k/inherited/

https://www.cnbc.com/2021/09/08/heres-how-to-avoid-costly-mistakes-if-you-inherit-a-401k-or-ira.html

"If the account holder died before 2020, and therefore is not subject to the changes in the SECURE Act, you can learn about distributions options in our Inherited IRA Brochure that covers scenarios prior to the SECURE Act,"

https://www.schwab.com/resource/youve-just-inherited-a-retirement-account

GodFather

Intuit Community Champion

Has she called the institution that financial institution that distributed the funds to her? Maybe they would be able to provide more immediate information on what her options are, if any. I'm personally not aware of an opportunity to reverse the 5 -year rule, but maybe the firm has insight?

C

ChiHoangAuthor

Level 6

She already called the plan institution, and they said she could not reverse and recommend her to put the distribution in Roth IRA. I hope that there is a way to reverse the 5-year rule.

BobKamman

Level 15

She did not rollover the account to her own IRA? She just left it sitting there in her late husband's name? What if she opens an IRA now and deposits the funds into it within 60 days? She can't rollover the tax withheld, but she can take that out of other funds if she has assets. I'm not saying such a rollover can be done, I haven't had a client who has made that mistake, but I would research it further. Maybe someone else here can tell us why it's not allowed.

C

ChiHoangAuthor

Level 6

The 401K plan is under her name. She transferred her husband's 401K balance to her name right after his death. I would think she can roll over to her own IRA account. I can file her tax return and recover the withholding tax. Can any one help me to confirm if I can do that ? Thanks so much for your help

IRonMaN

Level 15

Since the check came "a few days ago", I wouldn't count on getting that refund before the 60 day rollover window closes. You are talking a 2022 return, e-filing is a month to a month and a half out and I don't think the return will be processed fast enough to get her refund check back in time.

Slava Ukraini!

IRonMaN

Level 15

Sounds like a major communication breakdown between your client and the investment company. I have never personally run into the issue, but Bob was thinking the same thing I was thinking when I read this so I think it is worth looking into.

Slava Ukraini!

C

ChiHoangAuthor

Level 6

I just want someone to confirm that my client can roll over the distribution check to her own IRA account. She does have cash to roll over the withholding tax. And I will file her tax to get the refund of withholding tax later.

Thanks.

IRonMaN

Level 15

"I just want someone to confirm that my client can roll over the distribution"

Or, instead of waiting, you could always try doing a little research on the issue.

Slava Ukraini!

qbteachmtAnswer

Level 15

This is all very confused. For instance, you mention the 5-year rule, but the original owner died 6 years ago? 2017? What is the year of death? I believe the rule is to empty the account by the end of the 5th year after the year of the date of death, similar to how it reads for nonspouse:

"At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed."

And that should include rolling it to an Inherited IRA, then into her own IRA. That means now doing so by making up the withholding difference, depositing the gross. OR, pay taxes on the withholding as a partial distribution, of course.

Had the deceased spouse been taking RMDs, or reached that age? Did/has she continued that? He fell under the 70-year old rule. For any provision and reference you read, pay attention to if it is impacted by the SECURE Act, so you know if it falls under old or new rules.

You need to know specifics, and details, and what applies depending on the year in question. You mention she thought the plan was in her name, but "plan" doesn't apply. It's account that is important. Did she have it in a 401(k) account in her name, or as Beneficiary in his name? She could have rolled it into a Traditional IRA; talking about Roth is talking about a taxable conversion. 401(k) to Trad IRA is not a taxable event. She is not trying to reverse the 5-year rule. She is trying to know the options.

There are resources all over the web, such as:

https://www.investopedia.com/inherited-401-k-rules-to-follow-5425958

https://www.fool.com/retirement/plans/401k/inherited/

https://www.cnbc.com/2021/09/08/heres-how-to-avoid-costly-mistakes-if-you-inherit-a-401k-or-ira.html

"If the account holder died before 2020, and therefore is not subject to the changes in the SECURE Act, you can learn about distributions options in our Inherited IRA Brochure that covers scenarios prior to the SECURE Act,"

https://www.schwab.com/resource/youve-just-inherited-a-retirement-account

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