Trust Beneficiary of 401(k) and Roth IRA
Hi members – just joined – this is my first post so please bear with me – thanks in advance.
Participant of 401(k) and owner of Roth IRA passed away 02/15/03 – she was 44 years old.
Beneficiary on both is a Trust which leaves trust assets to named individuals in percentages (5% to nephew, 5% to nephew, 90% to mother).
Trustee called today and inquired about concern that distributions ought to be made before year end due to five (5) year passage of time since death? Since participant/owner passed away prior to RMD’s – 5 year rule does not apply under IRS Section 402(c), right?
I believe that PPA of 2006 provides that benefits paid to a Trust maintained for designated beneficiaries may be rolled over via a direct trustee-to-trustee transfer for each trust beneficiary without a time limitation, right? Also, any distinction re: 401(k) and Roth IRA regarding rollover?
Thank you for your time and expertise.
Permalink Submitted by mk foss on Wed, 2008-11-26 01:42
The default for payments to the beneficiary of a retirement plan is life expectancy. That method is elected by taking the first distribution by 12/31 of the year following the death. Since the owner of the accounts had not reached 70.5, the five year rule applies when life expectancy was not elected. The five year rule requires that the account be emptied by 12/31 of the year that contains the 5 year anniversary of the death. That would be 12/31/2008 in this case.
The 2006 Pension Protection Act allows the rollover to a beneficiary IRA from a qualified plan like a 401(k). A trust beneficiary can use the provision if it qualifies as a “see-through” trust. The IRS Notice interpreting the law indicates that the 401(k) plan must adopt a provision allowing these rollovers and the distributions from the new IRA would follow the method used in the plan. That means a new IRA would need to be emptied by 12/31/08 also.
Because nothing has happened in these 5 years, both the 401(k) plan and Roth IRA must be distributed in full by 12/31/08. There is a 50% penalty that would apply to any amounts left in the accounts at 12/31/08.
Recently someone obtained a ruling allowing them to switch to life expectancy by taking missed distributions (in your example for 2004-2007) based on life expectancy so that the account didn’t need to be liquidated at the end of the 5 year period. The IRS granted the ruling but did not waive the 50% penalties for the missed annual installments. That out wouldn’t help in this case unless the 401(k) plan allowed for life expectancy payouts.
It looks like this will be a big tax year for the trust.