76 year-old, fully employed husband died in July 2021, and his surviving spouse is 401K beneficiary.

A 76 year-old man died in July 2021 while he was still employed full-time at a major defense contractor. He was a participant in the 401K plan, and his 72 year-old spouse is the 100% primary beneficiary. I know he avoided RMDs from the 401K because he was still working, but does the surviving spouse have an RMD this year since he has passed away? I think her first RMD will be in 2022, but I just want to make sure of that….



Correct, there is no 2021 RMD because the participant passed prior to his RBD. If his spouse can complete a rollover of the plan balance before year end, her 2022 RMD will be lower since she will be able to use the Uniform Table for her IRA RMD. Otherwise, if she did the rollover in 2022 the plan would have to distribute her 2022 RMD using the higher single life table.
She should look into any highly appreciated employer shares in the 401k for NUA potential before doing a rollover to an IRA.  She could hold the shares in a taxable brokerage, sell them when needed (or for diversification ) and pay the lower LTCG rates on the gains instead of ordinary income rates. The cost basis will be taxable in the year of the LSD at ordinary rates, but she would not be utilizing NUA if the cost basis were not very low in relation to the current value. Of course, the longer he has worked for the employer, the greater the chance of having a low cost basis.



I certainly had that thought NUA, because the vast majority of the $1.2 million in the 401K is in employer stock.  In my mind, however, that breaks a critical rule of investing: diversification.  The husband traded between the fixed account and employer stock very frequently (which drove his wife nuts!), so we don’t know how appreciated the current shares are, and since she’s only 72 I’m thinking that she’d be better off rolling the 401K into a very diversified, balanced IRA portfolio before the end of the year.  She’ll have excellent pension and Social Security benefits, and beginning in 2022 the RMDs will round out her annual income needs very nicely.  



That trading activity likely resulted in an overall increase in the cost basis of the shares and the plan may even consider the re purchased shares as eligible. In short, the spouse should at least ask the plan for the number of shares eligible for NUA and what their cost basis is. She can then decide if it is low enough to consider for an LSD. Any distribution of employer shares will count toward her 2022 RMD if she does not rollover the plan until 2022.
Since diversification should trump tax benefits, she should unload most of the shares. However, the LSD can be limited to only the amount of her 2022 RMD, and she could then immediately sell those shares and pay the LTCG on the NUA portion of just the shares distributed. The rest could be sold in the 401k or rolled to an IRA and sold there.



I’ve taken occasional peeks at this forum for quite some time and I’ve learned a lot just by reading posts and the discussions that ensue.  You’ve been a reliable fixture on here for years, Alan, and I just wanted to offer my sincere gratitude for your enduring willingness to share what you know.



Thank you, Paul.



Add new comment

Log in or register to post comments