Inherited 401K / IRA - Distribution?

[Steelart99]

Most of our assets are in 401K / IRA accounts. I'm 57 and planning to FIRE in a few months and my wife is 49. We plan to use my 401K (rule of 55) along with cash accounts to fund our retirement for a number of years. We are holding off on taking pensions and SS for as long as possible.

So if I die, can my DW continue to use my 401k without penalty (inherited 401K for DW) or does it have to roll into a 401K for her that can't be used (without penalty) until she reaches 59-1/2? I have two joint/survivor pensions that are non-COLA'd and will not pay her expenses as she'd only get 50%.

 

[Big_Hitter]

I'm pretty sure the MDIB rules follow your DOB but I may be wrong. There should be an IRS publication that addresses this.

 

[Walt34]

So if I die, can my DW continue to use my 401k without penalty (inherited 401K for DW) or does it have to roll into a 401K for her that can't be used (without penalty) until she reaches 59-1/2? I have two joint/survivor pensions that are non-COLA'd and will not pay her expenses as she'd only get 50%.

As I understand it, a spouse (but no one else) has the option of taking it one of two ways. She can user either her age or your age and take the distributions that way, whichever works to her best advantage. But once she picks either age, that decision is final so RMD's may be a factor in deciding.

 

[Sarah in SC]

The plan really dictates what you can do with the 401k assets. Ideally you would leave it in the plan, under your name, as an inherited 401k. In that case, she would not pay a penalty on early withdrawals from it before 59.5.

If she rolls it into an IRA in her name, she would have the penalty for early withdrawal.

On any IRA assets, I'm pretty sure that she would have to roll those into her own IRA (would not recommend the inherited IRA option because spousal rollover is generally better).

Consult with your plan administrator and also with a good tax person to cover all this in more detail.

 

[meierlde]

The plan really dictates what you can do with the 401k assets. Ideally you would leave it in the plan, under your name, as an inherited 401k. In that case, she would not pay a penalty on early withdrawals from it before 59.5.

If she rolls it into an IRA in her name, she would have the penalty for early withdrawal.

On any IRA assets, I'm pretty sure that she would have to roll those into her own IRA (would not recommend the inherited IRA option because spousal rollover is generally better).

Consult with your plan administrator and also with a good tax person to cover all this in more detail.

Looking at the IRS web site it depends on how the IRA is titled, if its title indicates it is an inherited IRA then no 10% penalty is due:https://www.irs.gov/taxtopics/tc557.html

So perhaps the 401ks should be rolled over to an IRA now, since it is less clear about 401ks. (one should check with a tax expert on the proper way to structure the accounts so that no 10% penalty is due.

 

[GreenER]

Depending on your health and expected longevity and given the fact that your wife is younger and would only get 50% of your non cola'd pension, it seems to me you might better take the pension sooner while it still has more purchasing power and save more of your 401K for the latter part of your retirement since she would get 100% of anything remaining in the 401K if you were to die before her.

 

[Steelart99]

Depending on your health and expected longevity and given the fact that your wife is younger and would only get 50% of your non cola'd pension, it seems to me you might better take the pension sooner while it still has more purchasing power and save more of your 401K for the latter part of your retirement since she would get 100% of anything remaining in the 401K if you were to die before her.

That is actually a good point ... obvious now that you stated it. She is concerned that should something happen to me, she would not have access to the funds we'll be using in our early retirement (i.e., my 401K).

I did not want to roll those funds (401K from current company) over to an IRA yet as the "Rule of 55" makes the money available to me now without penalty.

 

[Steelart99]

The plan really dictates what you can do with the 401k assets. Ideally you would leave it in the plan, under your name, as an inherited 401k. In that case, she would not pay a penalty on early withdrawals from it before 59.5.

If she rolls it into an IRA in her name, she would have the penalty for early withdrawal.

On any IRA assets, I'm pretty sure that she would have to roll those into her own IRA (would not recommend the inherited IRA option because spousal rollover is generally better).

Consult with your plan administrator and also with a good tax person to cover all this in more detail.

DW was concerned that should I die anytime soon (not in my plan ... ), that she would not have access to any of the funds we are planning to use in early retirement, i.e., my 401K. I'm gonna have to research this a bit more.

 

[Steelart99]

Looking at the IRS web site it depends on how the IRA is titled, if its title indicates it is an inherited IRA then no 10% penalty is due:https://www.irs.gov/taxtopics/tc557.html

So perhaps the 401ks should be rolled over to an IRA now, since it is less clear about 401ks. (one should check with a tax expert on the proper way to structure the accounts so that no 10% penalty is due.

Good link ... seems to indicate that one of the exceptions to this additional 10% tax for early distributions is:

• Made to a beneficiary or estate on account of the IRA owner's death

So, it would seem that DW could use my IRA to fund her expenses for a few years. Unfortunately, my IRA is only about 1/2 of the value of the 401K (with my current company) that I'd planned to use in ER under the "Rule of 55". Can't roll that over to an IRA yet as it would then be unavailable to me until 59-1/2.

 

[N02L84ER]

If she rolls it/them into her own IRA accounts, she can do 5+ years of 72T distributions without having to pay the 10% tax for early distributions.

 

[Steelart99]

If she rolls it/them into her own IRA accounts, she can do 5+ years of 72T distributions without having to pay the 10% tax for early distributions.

Ahhhhh ... another aspect of our tax laws that I had no idea about. More research ...

Thanks!

 

[meierlde]

Good link ... seems to indicate that one of the exceptions to this additional 10% tax for early distributions is:

• Made to a beneficiary or estate on account of the IRA owner's death

So, it would seem that DW could use my IRA to fund her expenses for a few years. Unfortunately, my IRA is only about 1/2 of the value of the 401K (with my current company) that I'd planned to use in ER under the "Rule of 55". Can't roll that over to an IRA yet as it would then be unavailable to me until 59-1/2.

You might check if she could roll the 401k over to an IRA if you die, and then get the penalty free distributions.

 

[FIREchief]

OP: if you haven't already done so, you may wish to contact your 401k administrator to find out exactly what distribution options they make available to a surviving spouse. I was surprised to find out that my Megacorp 401k (which is normally pretty good) requires an immediate 100% rollovers or withdrawal when the plan participant passes away.

 

[Steelart99]

OP: if you haven't already done so, you may wish to contact your 401k administrator to find out exactly what distribution options they make available to a surviving spouse. I was surprised to find out that my Megacorp 401k (which is normally pretty good) requires an immediate 100% rollovers or withdrawal when the plan participant passes away.

Now that's an interesting issue. I will give them a call this next week and check on that. Thanks for the pointer!