MIL needs to do something with FIL's 401K

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
JohnML
Posts: 11
Joined: Mon Dec 22, 2014 1:09 pm

MIL needs to do something with FIL's 401K

Post by JohnML » Sat Mar 10, 2018 12:04 pm

Just now in the last few weeks my 80 year old MIL has begun to reveal details of her financial situation to her 2 daughters. FIL died 20 years ago and she is the beneficiary of his 401K which is invested 100% in company stock current value 1.75M (I know :( ). She has never touched the account other than receive the RMDs that the company sends to her once a year. The problem we are trying to resolve right now is getting her daughters added as beneficiaries to the account. Since the 401K is still her husband's and she is the beneficiary, she cannot add beneficiaries. As a surviving spouse, I understand she could roll the 401K over to an IRA in her name. The she could add the kids as beneficiaries to her IRA. When she dies, this would allow each kid to either take it as a lump sum and pay all the taxes immediately or set up an inherited IRA.

She has an emotional attachment to the company stock and refuses to consider any option that involves selling it or diversifying. So we are not going to fight that battle now (or maybe ever since she is very healthy and could outlive this whole generation) and focus on getting the account set up so that it can have beneficiaries added. She also has no interest in paying a financial advisor to do anything... Ever...

My wife spoke to a Fidelity representative on the phone who told her the stock could be moved there to her own IRA without having to be sold and repurchased. Fidelity would handle all the details of the move. Then she could add whoever she wants as beneficiaries to the IRA.

I read about Net Unrealized Appreciation (NUA) but don't believe there is anything to consider there because she is way past one year for any triggering event.

I am also wondering about how the RMD is being calculated. The RMD for 2018 is using an “Actuarial Life Expectancy Factor” of 9.7 which seems high. My FIL was born in 1933 and MIL was born in 1937.

What are we missing?

ionball
Posts: 74
Joined: Wed Jan 31, 2018 12:17 pm

Re: MIL needs to do something with FIL's 401K

Post by ionball » Sat Mar 10, 2018 12:26 pm

I didn't check the IRS table, but the RMDs do grow larger with age and 9.5% is probably about right for your MIL. Actually a high RMD may be a saving grace by reducing the single stock risk! Moving to the Fidelity IRA may be the best solution if handled trustee to trustee.

JohnML
Posts: 11
Joined: Mon Dec 22, 2014 1:09 pm

Re: MIL needs to do something with FIL's 401K

Post by JohnML » Sat Mar 10, 2018 2:08 pm

I found the right IRS table for the RMD and 9.7 is correct. Publication 590-B Table I (Single Life Expectancy)

Spirit Rider
Posts: 7977
Joined: Fri Mar 02, 2007 2:39 pm

Re: MIL needs to do something with FIL's 401K

Post by Spirit Rider » Sat Mar 10, 2018 2:24 pm

I think she might be able to transfer ownership of the Inherited 401k account to herself and the name beneficiaries. Then there should be no need to rollover to an IRA and there may be a very good reason not to.

Alan S. is an expert in this area and hopefully he will comment. I will just touch on a couple of things I think I know. Company stock held in a 401k can receive special treatment under Net Unrealized Appreciation (NUA). This allows the company stock to be distributed to a brokerage account and have the gains taxable at capital gains rates instead of ordinary income tax rates.

However, this can only happen upon a triggering event; (a) Death, (b) Disability, (c) Separation from Service, or (d) Reaching age 59 ½.

I believe the best option would have been for the MIL to have taken a NUA distribution when the FIL died. She then wouldn't have had to take RMDs. I believe only the original basis would have been subject to ordinary income tax rates and the gains subject to capital gains rates.

However, I believe the intervening RMDs prevent that now. Do not rollover to an Inherited IRA. Any potential NUA treatment will be lost. I do not know if NUA treatment applies to non-spouse beneficiaries. Regardless, at a minimum have the MIL acquire ownership of the inherited 401k and name beneficiaries if allowed.

User avatar
Epsilon Delta
Posts: 7422
Joined: Thu Apr 28, 2011 7:00 pm

Re: MIL needs to do something with FIL's 401K

Post by Epsilon Delta » Sat Mar 10, 2018 3:38 pm

JohnML wrote:
Sat Mar 10, 2018 2:08 pm
I found the right IRS table for the RMD and 9.7 is correct. Publication 590-B Table I (Single Life Expectancy)
If the MIL rolls this into her own (not-inherited) IRA she can calculate RMDs based on Table III (Uniform Life expectancy) which will halve the RMD. This may increase the value of the IRA to any of her heirs. I'm not sure if this option is available if it remains in a 401(k).

JohnML
Posts: 11
Joined: Mon Dec 22, 2014 1:09 pm

Re: MIL needs to do something with FIL's 401K

Post by JohnML » Mon Mar 12, 2018 6:54 pm

Thanks everyone. I believe we are going to do a trustee to trustee to an IRA in her name. Then she can add the right beneficiaries. There is no option to do that inside the company's 401K. She missed the boat on NUA as all the triggering events were decades ago.

Post Reply