Estate as beneficiary of 401K

[valwayho]

Years ago my father named his estate as beneficiary of his 401K. He passed away 5 years ago and this year my mother has been told she cannot roll her money to an IRA. Hence she is facing a major tax bill. Everything I have read supports this however I thought I would ask if any one might know if there is a way to roll this money over instead of taking the lump sum distribution.

Thank you

[alan-oniras]

How is it that the estate was named as beneficiary? By law, the spouse of the employee is the deemed beneficiary of the plan unless the surviving spouse (mother) signed a consent form. Were they married when your father died, and if so, did she sign a consent form?

Further questions:
1) Was your mother the sole beneficiary under his will, or intestate beneficiary under state law?
2) What is the reason this is coming up 5 years after his death?
3) Any other special circumstances here?

[valwayho]

My mother did sign a consent form in order for the estate to be named as the beneficiary.
They were married when my father died.

1. My mother was the sole beneficiary under his will.
2. The reason it is coming up now is that the 401K plan rules dictate that at the end of this year, the fifth since his death, the money needs to be removed from the plan.
3. No other special circumstances.

thank you

[alan-oniras]

Yes, there are several IRS letter rulings allowing the surviving spouse who is the sole estate beneficiary to roll over the proceeds to her own IRA. Following is a link to Bruce Steiner's 1997 article on the subject, and the article still remains applicable. Some complications have been added by the 5 year delay in this case:

http://www.kkwc.com/docs/AR20050125164755.pdf

If the proceeds are paid to the estate, they would generally not be considered eligible rollover distributions for 20% withholding purposes. The estate executor could then distribute the IRA proceeds to the surviving spouse who could complete the rollover. This should be done within 60 days of the 401k distribution, but it might take some searching to find an IRA custodian willing to open the rollover IRA.

Another hurdle is that the RMDs required of your mother as a beneficiary cannot be rolled over to her own IRA. Those amounts should be distributed to her and she should file a 5329 requesting a waiver of the excess accumlation penalty. Remember that there was NO RMD required for 2009.

Most plans will refuse the direct rollover to her IRA even if provided with references from Bruce's article, but she could always ask. Again, the life expectancy RMDs complicate the situation now that 5 years have passed. If your father died prior to his required beginning date with an estate beneficiary, the 5 year rule would apply and that is probably why they use the end of the 5th year after his death as a deadline for distribution.

If Bruce sees this, perhaps he will comment on the most efficient way to proceed with the plan and/or IRA custodians assuming she wants to preserve her rollover at this point in time.

[bsteiner]

As Alan pointed out, Valwayho's mother may be able to do a rollover. If she wants absolute certainty, she can apply for her own private letter ruling.

[valwayho]

Alan & Bruce
Thank you for taking the time to assist with this issue.
I will contact my mother's accountant and lawyer and ask them to pursue this strategy.

Regards

Jon