The Continued Battles with Inherited IRAs, PSPs, and Rollovers
This week's Slott Report Mailbag looks into Inherited IRAs, Defined Contribution Profit Sharing Plans, and Roth 401K rollovers. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
Question: I have a somewhat complex situation. Cliff notes below:
A 401k participant is 28 years old. He dies in September 2007 and his father is the primary beneficiary. There is no contingent listed on 401k. The father inherits the 401k account and transfers it to an inherited IRA, and lists his daughter as primary beneficiary (original 401k’s sister). The father dies in the same year, November 2007. The account is transferred into an inherited IRA in the daughter’s name.
The issue here is determining the Applicable Distribution Period. The father is much older so his adivisor will be much smaller using his age as opposed to using the daughter’s age. But, since the father passed away in the same year as the original owner of these funds, is there a way completely look beyond the father as having owned these funds and to use the daughter’s age as the ADP so these funds can be stretched over a longer period of time? It was my understanding that when a successor beneficiary takes over to receive distributions from the inherited IRA, the original ADP is still in effect, and the IRA must be distributed over that remaining period to the successor beneficiary(ies).
What are your thoughts? Thanks for your time. - Brian
Answer: Unfortunately, the daughter will not be able to use her own age to determine the required minimum distributions (RMDs) that must be taken from the inherited IRA. Here is why. The original beneficiary of the 401(k) participant was his father. The father, as a designated beneficiary, transferred the funds to an inherited IRA and named his daughter as his beneficiary. The RMDs from this inherited IRA would calculated using the father’s single life expectancy. The daughter is a successor beneficiary. After the father’s death, she can continue taking RMDs from the inherited IRA using her father’s life expectancy. However, she cannot switch to calculating RMDs over her own much longer life expectancy. This is true even the father died in the same year as his son, the original owner of the 401(k).
Question: I am 71 and have a Roth (401K) & a Defined Contribution Profit Sharing Plan (PSP) with my employer. I am still employed with the employer of these two plans. I am not taking RMD's from these plans as I am still employed. In 2017 I would like to roll over (trustee-to-trustee) the Roth 401K to a Roth IRA and roll over the PSP to an IRA. However, I would like to continue deferring RMD's on these two accounts until I retire from my employer.
Can I do this? - Gregory
Answer: Good news and bad news! Here is the bad news first. If you meet the definition of “still-employed” you can defer RMDs from your company plan. However, this exception does not apply to your IRAs. If you roll over your profit sharing plan to your IRA in 2017, it will become part of your December 31, 2017 balance and you would therefore need to take an RMD from your IRA, that includes your profit sharing balance, in 2018. No RMD deferral is possible. There is better news when it comes to your Roth 401(k). RMDs are never required during your lifetime from a Roth IRA. You can roll over your Roth 401(k) to a Roth IRA without any RMD concern. Keep in mind though that your beneficiaries will have to take RMDs from the Roth IRA they inherit from you.