Inherited Retirement Plan

[Jesse]

Seeking confirmation of my understanding (or lack of):

A 20 year old is beneficiary of Aunt's, (age 49 in year of death), 401(k) plan. She can roll roll this into an IRA but it should stay in the deceased name with beneficiary's name and social security number - correct?

After rolled over the beneficiary then has three options:
1. Cash it out and pay the taxes;

2. Take out the entire balance before the end of the fifth year following the year of death; or

3. Take out the distributions over her own life based on the single lifetime table.

If option 3 is taken the RMD must be taken each year by the beneficiary, which in this case would be just under $300 currently, but the beneficiary can always take out more in any given year and pay the taxes but would not be subject to any penalty, correct?

[appelman]

From BankRate.com

The proper way to do a nonspousal retirement-plan transaction:

• Do a trustee-to-trustee transfer, not a rollover, to a properly titled "inherited IRA."
• The deceased IRA owner's name must appear on the account.
• The titling would look like this: Sylvester Jones IRA deceased (date of death) FBO (for the benefit of) Clarence Jones.
• The check cannot be made out to Clarence directly.
• The check cannot go into Clarence's existing IRA.
• If the 401(k) plan administrator doesn't want to handle the trustee-to-trustee transfer, make sure the check is issued to the inherited IRA that's titled properly, as described above.
• Beginning in the year following death, the beneficiary must take the minimum required distribution (or a higher amount as needed).
• Funds build up in the tax-deferred account, and payments may last over the lifetime of the beneficiary.

(I also believe you are correct about the absence of penalties.)

[joanmcq]

Yes, no penalties (the code will be '4'). I have one from my dad and take an RMD every year.

[Lion]

Ttb

TTB 13-24 talks about Rollover to beneficiary and then refers back to Inherited IRAs earlier on the same page. The retirement plan can be rolled over directly to an IRA of a beneficiary; then it's treated as an inherited IRA. Inherited IRA choices 2) tells about taking the entire account balance by the end of the fifth year following the year of death, only when participant died before the date RMD began, though. OP mentioned the deceased was only 49, so that option might be available.

[Jesse]

Thanks all for confirmation -

Basically swaying towards option 3 because the money is not currently needed.

I see no restrictions in taking out more than the RMD in future years so if circumstances would change in the future she can take out more or all at that time, pay the income taxes but no penalties.

Often it helps to "talk out loud" and since there is no one else in my office I'm thankful you listen - so thanks again!!

[joanmcq]

Putting the money in a beneficiary IRA is a good strategic move. Since your client is young, as you indicated, the RMDs will be negligible, but the cash is available if needed in the future. If not, she has some retirement funds already set away. And if she is working, she can do with the RMDs what I was doing for a few years; taking the money and putting it in her own IRA or Roth.

[Jesse]

Thanks

At her age I think the RMD's reinvested into a Roth is good suggestion.

[Gary2]

The retirement plan can be rolled over directly to an IRA of a beneficiary; then it's treated as an inherited IRA.

This is one of those cases where being pedantic is appropriate. The IRA might be called by some people a "beneficiary IRA". However, with the exception of a surviving spouse, you cannot have the plan rolled over into an ordinary IRA that the beneficiary happens to have. It must be totally separate from any ordinary IRAs owned by the beneficiary, and must be titled as Appleman indicated.

[ttbtaxes]

Authoritative source needed

Option 3, in the original post speaks of choosing a payout over the life of the beneficiary. That makes sense. The beneficiary would also have the option to take amounts higher than the RMD in any year he chooses. So, if the beneficiary decided to buy a house and needed a down payment, he could access the inherited IRA.

For the life of me, I can not find anything authoritative that allows the beneficiary the right to take an amount above the RMD when the lifetime option is chosen.

Anyone know of something authoritative I can put my finger on?

[Burke]

It's inherent in the term RMD. M stands for "minimum." He/she can always take more.