401k , IRA 457, tax treatment on death of account owner

[Lakewood90712]

How is a tax rate established for distribution of pre tax funds if the account owner dies before withdrawal (unmarried account owner). Or is this event a tax freebie to the estate and beneficiaries ?

 

[FlaGator]

I was the designated beneficiary of my late wife's IRA. Balance was rolled over into mine, and the basis was added to mine

 

[Travelfreek]

My husband inherited his mom's IRA. Because he was a non-spouse, he had required minimum distributions (RMDs) based in his age and life expectancy. Each year end, the RMD was modified per the account balance. All distributions were taxable to our income so we would consider that each year we withdrew from it till it was gone. It would have been nice if his ma withdrew it yearly into her bank acct since she was in such a low tax bracket but she wasn't savvy about it. My husband was the sole beneficiary (only child). It was a great blessing for us as we are focused now on paying off our mortgage.

 

[Travelfreek]

Also, pay attention to RMDs! Huge penalty if they are not followed (50% penalty I believe)

 

[Lakewood90712]

Ok so my understanding now is: 1 Basis to the beneficiary is the current value ?, 2 the beneficiary can roll over to his/ her plan if age does not yet require RMD, or 3, start RMD if required . 4, If the beneficiary is under 59 1/2 , can the beneficiary take it all w/o penalty , or is a 72T required ? . 5, All is treated as ordinary income.

 

[FlaGator]

The "basis" I referred to was the amount of non-deductible contributions made to her account, and that was added to mine (we both had modest non-deductible contributions).

All withdrawals are treated as ordinary income, and there is no "step up" in taxable basis as there is with assets with different tax preference, like stocks or houses.

Your situation is different than mine and I wouldn't make any moves without understanding the IRS regs. Even if that means paying a tax-specialist CPA for guidance. The hassle of unwinding a wrong move and/or the cost of doing so isn't worth going forward with incomplete knowledge IMO

 

[kaneohe]

Ok so my understanding now is:................, 2 the beneficiary can roll over to his/ her plan if age does not yet require RMD, .............................. 4, If the beneficiary is under 59 1/2 , can the beneficiary take it all w/o penalty , or is a 72T required ? ..........................

You cannot combine own and beneficiary IRAs unless you inherit as a spouse.
Non-spousal IRAs cannot be combined with your own. Non-spousal IRAs have RMDs that start almost immediately (the next yr). Starting age is not 70.5 like normal IRAs.

Sounds like no early withdrawal penalty ............check out the non-spouse beneficiary section: http://www.schwab.com/public/schwab...rstanding_iras/inherited_ira/withdrawal_rules

sounds like 401K plans can have their own rules which could differ from other 401K plans:
https://www.fidelity.com/viewpoints/personal-finance/401k-inheritance-tips

 

[evilanne]

See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary & https://www.irs.gov/pub/irs-pdf/p590b.pdf

IRA with basis. If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. . . . you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

A basis may apply to older IRAs, most recently established IRAs that have after tax contributions will be in a separate designated Roth IRA account. You will need to get any basis information from wherever the account was held (or it will all be taxable) and the 31 Dec account value the year of the decedent's death in order to calculate your RMD.

Owner Died Before Required Beginning Date If the owner died before his or her required beginning date (defined earlier), and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death using your single life expectancy shown on Table I in Appendix B as determined under Beneficiary an individual, later.

 

[kaneohe]

........................................... You will need to get any basis information from wherever the account was held (or it will all be taxable)....................................................

Generally, the custodian of the account has no idea about basis in the account.
Only taxpayer knows, if anyone does.

 

[jebmke]

Generally, the custodian of the account has no idea about basis in the account.
Only taxpayer knows, if anyone does.

My 401(k) custodian (Fidelity) had separate accounts for the pre-tax and after-tax contributions and earnings. It may depend on how the plan is written and who the custodian is for a qualified plan. Certainly IRA custodians don't know.

 

[googily]

Having just rolled over my late DH's 401k into an inherited IRA, I can say other posters are correct. For the pre-tax contributions DH made and the subsequent growth/return on those monies while it was in his 401k, I will pay income tax as ordinary income on my RMDs and any additional money I take out.

I took his after-tax 401k contributions as a lump sum. My understanding on those is that there is no tax, since it was only his contributions (not any return on those contributions). Like a Roth, I guess?

 

[Blue Collar Guy]

My husband inherited his mom's IRA. Because he was a non-spouse, he had required minimum distributions (RMDs) based in his age and life expectancy. Each year end, the RMD was modified per the account balance. All distributions were taxable to our income so we would consider that each year we withdrew from it till it was gone. It would have been nice if his ma withdrew it yearly into her bank acct since she was in such a low tax bracket but she wasn't savvy about it. My husband was the sole beneficiary (only child). It was a great blessing for us as we are focused now on paying off our mortgage.

hahah it would have been a lot nicer for her if she didnt die.

 

[Travelfreek]

not really sure what you mean, Blue Collar Guy. with your response. My point was sometimes people in very low tax brackets who are older (she was 81 years old) who are not inclined to spend their taxable IRA once distributed may want to go ahead and cash it in even if it means keeping in the bank. This way she doesn't incur any income tax (she made only $13000 a year most of which was SS. Once inherited, it would be tax free to the beneficiary. She was a huge SAVER (born in 1928) and lived very frugally because she was used to it. She died of lung cancer but lived a really full life right to the last couple of days, which was wonderful. She had high energy and was sharp as a tack. She was annoyed that I was off 6 cents in reconciling her most recent bank statement.