IRA Analyst

QUESTION:

If a non-spouse beneficiary inherits a 401(k), what are the options? Can you roll the money into an inherited IRA? Are there any other options, and over what time period does each option require the account to be drained? Thank you so much for your help.

Roger

ANSWER:

Roger,

The payout rules for non-spouse beneficiaries of 401(k) plans are the same as those that apply to non-spouse beneficiaries of IRAs. We must first determine if the non-spouse is an eligible designated beneficiary (EDB) or a non-eligible designated beneficiary (NEDB). EDBs can use their own single life expectancy to take annual required minimum distributions (RMDs) from the inherited account. NEDBs will get the 10-year rule. Whether or not RMDs apply within the 10-year period depends on the age of the deceased 401(k) plan participant. Regardless of the beneficiary’s status as either an EDB or NEDB, the inherited 401(k) can be directly rolled over to an inherited IRA, and the applicable payout schedule will follow. Note that non-designated beneficiaries (NDBs), such as an estate, cannot move plan funds to an inherited IRA. Also, 401(k) plans can be more restrictive and require a quicker payout vs. what is outlined above.

QUESTION:

I am currently retired, age 65, and have a 401(k) plan. How far in advance should I transfer money from my 401(k) to an existing traditional IRA to fund a qualified charitable distribution (QCD)? Can I use the same traditional IRA account to fund QCDs in future years? Need I transfer the entirety of my 401(k) balance into an existing traditional IRA up front, or may I do it gradually over time?

Best regards,

Ken

ANSWER:

Ken,

Step 1 is to become eligible to complete a QCD. Since a person cannot do a QCD until age 70½, you have five years to get your ducks in a row. You are correct to anticipate the need to roll over 401(k) funds to an IRA, because QCDs cannot be done from a 401(k) plan. Yes, you can use the same traditional IRA to receive your 401(k) rollover and handle all of your QCDs. You could do partial rollovers to your IRA to fund QCDs between ages 70 and 74, but this could become problematic when you are RMD age. Since you are only age 65, at age 75 there will be an RMD due on your 401(k). RMDs cannot be rolled over. So, you would need to take the RMD from the plan before doing any rollovers to your IRA. The income from the 401(k) RMD cannot then be offset with a future QCD. If your goal is to offset future RMDs with QCDs, it might be wise to roll over your entire 401(k) to your IRA before the year you turn age 75.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/inherited-iras-and-funding-qcds-todays-slott-report-mailbag/