401k Rollover to an IRA

Submitted by Mel Langer on Wed, 2010-03-31 05:25

A new law effective 1/1/10 requires your 401k plan to allow a non spouse beneficiary to rollover the inherited funds to an IRA. Spouses have always been free to transfer inherited money to an IRA.

The advantage: Once the money is in an IRA, beneficiaries can stretch the withdrawals-and the tax bills-over their own life expectancies, rather than having to cash out the account. The beneficiary must then change the name of the account to, as an example… read, “John Smith deceased, IRA for the benefit of George Smith”, to take advantage of this stretch provision enacted by the I.R.S.

Must an IRA have already been set up by the deceased, for the non spouse beneficiary to rollover the money into?

Or, can the non spouse beneficiary just rollover the 401k funds and set up the IRA that way….and still get the benefit of stretching RMD’s over the beneficiaries life expectancy?

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Permalink Submitted by mk foss on Wed, 2010-03-31 17:22

The nonspouse beneficiary is to set up the beneficiary IRA in the usual way – giving the name of the decedent, their name as beneficiary and their SSN. Then the 401k plan adminstrator can “transfer” the funds to the inherited IRA. Although we call this a rollover, it’s unlike rollovers in the traditional sense because it is accomplished by transfers.

Permalink Submitted by Alan Spross on Wed, 2010-03-31 19:02

As indicated, the non spouse beneficiary can set up the inherited IRA just before the transfer is ordered, however there is a time limit if the life expectancy option is to be preserved. If the transfer of funds is not made by the end of the year following the year of plan owner’s death, the inherited IRA becomes subject to the plan provisions with respect to RMDs. If the plan provision had not adopted the life expectancy default for deaths prior to the RBD, the beneficiary would then be stuck with that 5 year rule for the inherited IRA as well.

This per Notice 2007-7, Q&A # 19.
http://benefitslink.com/IRS/notice2007-7.pdf

Permalink Submitted by Anonymous (not verified) on Wed, 2010-03-31 19:53

Thanks alan:

The “time limit” issue is really important here and I am glad you pointed it out. I do not think many realize this.

pko

Permalink Submitted by Mel Langer on Thu, 2010-04-01 02:15

Thanks to both of you for your response.

Special thanks to Alan for your crystal clear explanation.

Much appreciated.