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INHERITED IRA RMD REQUIREMENTS AND ROTH 401(k) RULES: TODAY’S SLOTT REPORT MAILBAG

Question: Hello, I am involved with a traditional non-spouse inherited IRA that was passed from my mother to myself and two siblings in 2022. My mother was 84 when she passed and was taking RMDs. I understand the new legislation passed under the SECURE Act requires any such traditional inherited IRA requires full distribution by the end of the 10-year period following her death. I fully understand the law change.

The Two Types of 457(b) Plans

Some of you are aware that there are two types of section 457(b) retirement plans – governmental plans for state and local municipal workers, and “top hat” plans for highly-paid and managerial employees of tax-exempt employers like hospitals. What you may not know is that the two types of plans are different in several important ways.

What Protection Do Spouses Get in Company Plans?

The federal ERISA law gives spouses of plan participants in ERISA-covered plans certain rights to the participant’s account. There are two types of ERISA financial protection for spouses. Spouses of IRA owners usually don’t have similar rights. The first type of protection applies to all ERISA plans. Those plans must automatically treat a married participant’s spouse as his beneficiary – unless the participant designates another beneficiary and the spouse gives written consent. (Spouses in community property states also receive this protection for IRAs established during marriage.)

Rollovers From a Company Plan & Inherited IRAs: Today's Slott Report Mailbag

By Sarah Brenner, JD
Director of Retirement Education
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Question:

I am 75 years old and am planning to retire this year.  I have a 401(k) plan with my employer and, I assume, need to roll it over into an IRA.  In this case do I need to take a 2021 RMD?  If so, how is it calculated?  I have taken RMDs on my other IRA accounts so I know how to use the factor according to my age, but what should the basis be?  Is it the value of my 401(k) on Dec. 31, 2020?

Thank you in advance.

John


Answer:

Hi John,

Plans Can Still Pay Out 2020 RMDs, but Employees Don’t Have to Treat Them That Way

Many of you may have already received, or may be receiving, an RMD (required minimum distribution) from your employer plan this year. If the CARES Act waived 2020 RMDs from plans and IRAs this year, how could a company plan be making RMD payments? The answer is a little complicated. Under the tax code, plans are allowed to force participants to receive a distribution without their consent at a certain age. For most plans, that is age 65. The CARES Act did not change that rule. So, plans are legally permitted to pay out RMDs at age 70 ½ or later – even in 2020. Plans may be continuing to pay RMDs to avoid modifying their procedures for processing distributions just for this year.

Spousal Protection in Company Retirement Plans

One important difference between IRAs and company retirement plans is spousal protection. Except for community property states, spouses of IRA owners do not have any rights to the account. By contrast, many workplace plans must provide spouses at least some financial protection. In the world of company plans, spouses have potentially two types of protection, depending on the type of plan. Spousal Consent to Plan Distributions. The first type of protection requires certain plans to pay a married participant’s benefit as a specific type of annuity – unless the participant elects another form of payment and the spouse consents. The required annuity type is called a “qualified joint and survivor annuity” (QJSA). A QJSA pays a monthly benefit over the participant’s lifetime and, if the spouse outlives the participant, pays the spouse a monthly benefit over the spouse’s remaining lifetime.

10 Things to Know About the Still-Working Exception

Are you approaching retirement age and not looking forward to being forced to take unwanted required minimum distributions (RMDs) from your retirement account? You may be looking for a way to delay those distributions. You may have heard about the “still-working” exception, which can allow RMDs to be put off. Will this exception help you? Here are 10 things you need to know.

5 Retirement Savings Strategies for Younger Workers

No one can argue that the millennial generation faces big challenges when it comes to savings. Younger workers are dealing with record setting student loan debt, high housing costs and stagnant wage growth. It’s hard to save for retirement when you are worried about the next month’s rent. Here are five strategies to help younger workers get started saving for retirement.

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