401k Rollover Procedural Question

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Topic Author
JohnML
Posts: 32
Joined: Mon Dec 22, 2014 1:09 pm

401k Rollover Procedural Question

Post by JohnML »

My MIL is rolling her deceased husband’s 401k, of which she is the beneficiary, into an IRA in her own name at Fidelity. She wants to name her own beneficiaries which she cannot do as long as the money is in her husband’s old 401k. She will also receive a more favorable RMD factor with it being her own IRA.

The current custodian of the 401k told her they cannot send the entire balance of the 401k in a check directly to Fidelity. They told my MIL they would send a check directly to Fidelity for the amount in the 401k minus what would have been her RMD for 2020 (plus an insignificant amount of money that is not taxable). That will then be deposited into an IRA in her name at Fidelity. The 401k custodian will also issue a second check directly to my MIL for the small amount of non-taxable plus what would have been her RMD for 2020. No taxes will be withheld from that check. She was told since there is no IRS requirement to take an RMD for 2020 she could send a check in the amount of the RMD to the new Fidelity IRA.

My MIL was hoping to avoid having anything (or maybe just the small non-taxable amount) mailed directly to her but she was told by the custodian they cannot do that. Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?

Does this sound OK? It seems convoluted to me.

Full disclosure: My wife is actually helping her mother do this and I am providing my meager assistance.
RetiredAL
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Re: 401k Rollover Procedural Question

Post by RetiredAL »

JohnML wrote: Tue Sep 15, 2020 2:03 pm My MIL is rolling her deceased husband’s 401k, of which she is the beneficiary, into an IRA in her own name at Fidelity. She wants to name her own beneficiaries which she cannot do as long as the money is in her husband’s old 401k. She will also receive a more favorable RMD factor with it being her own IRA.

The current custodian of the 401k told her they cannot send the entire balance of the 401k in a check directly to Fidelity. They told my MIL they would send a check directly to Fidelity for the amount in the 401k minus what would have been her RMD for 2020 (plus an insignificant amount of money that is not taxable). That will then be deposited into an IRA in her name at Fidelity. The 401k custodian will also issue a second check directly to my MIL for the small amount of non-taxable plus what would have been her RMD for 2020. No taxes will be withheld from that check. She was told since there is no IRS requirement to take an RMD for 2020 she could send a check in the amount of the RMD to the new Fidelity IRA.

My MIL was hoping to avoid having anything (or maybe just the small non-taxable amount) mailed directly to her but she was told by the custodian they cannot do that. Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?

Does this sound OK? It seems convoluted to me.

Full disclosure: My wife is actually helping her mother do this and I am providing my meager assistance.
Sounds reasonable to me. There are 3 buckets: Pre-rax 401k $, post-tax 401K $, and RMD $. It's up to your MIL to do whatever she wants with those three buckets. When she rolls the RMD $ back into the IRA, make sure it's clearly stated to Fidelity that it is a re-capture of a RMD.

"Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?" Our politicians are notorious for changing laws/rules at the last minute with no/little consideration of the logistics of implementing it.
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Eagle33
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Re: 401k Rollover Procedural Question

Post by Eagle33 »

Wasn't there a August 31, 2020 deadline to return a 2020 RMD?
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Topic Author
JohnML
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Joined: Mon Dec 22, 2014 1:09 pm

Re: 401k Rollover Procedural Question

Post by JohnML »

RetiredAL wrote: Tue Sep 15, 2020 2:54 pm
Sounds reasonable to me. There are 3 buckets: Pre-rax 401k $, post-tax 401K $, and RMD $. It's up to your MIL to do whatever she wants with those three buckets. When she rolls the RMD $ back into the IRA, make sure it's clearly stated to Fidelity that it is a re-capture of a RMD.

"Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?" Our politicians are notorious for changing laws/rules at the last minute with no/little consideration of the logistics of implementing it.
Thanks RetiredAL.

I thought it odd that this custodian is sending RMDs to everyone rather than hold this year. The phone rep said their clients like their RMDs and would be upset if they didn't get them. I guess I am too used to reading posts online about people trying to lower their RMDs or not wanting/needing them. Maybe it is because this is a company 401k plan. Most folks still in this plan after RMD age are probably not wealthy.
Topic Author
JohnML
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Re: 401k Rollover Procedural Question

Post by JohnML »

Eagle33 wrote: Tue Sep 15, 2020 10:23 pm Wasn't there a August 31, 2020 deadline to return a 2020 RMD?
Thanks, I read about the deadline right after the meeting with the 401k custodian. I was not prepared for the way the 401k custodian needed to process the rollover and I was ignorant of the special rules for returning RMDs. I was hoping maybe technically this was not an RMD but rather the way the custodian is choosing to process her 100% rollover.
Alan S.
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Re: 401k Rollover Procedural Question

Post by Alan S. »

JohnML wrote: Tue Sep 15, 2020 2:03 pm My MIL is rolling her deceased husband’s 401k, of which she is the beneficiary, into an IRA in her own name at Fidelity. She wants to name her own beneficiaries which she cannot do as long as the money is in her husband’s old 401k. She will also receive a more favorable RMD factor with it being her own IRA.

The current custodian of the 401k told her they cannot send the entire balance of the 401k in a check directly to Fidelity. They told my MIL they would send a check directly to Fidelity for the amount in the 401k minus what would have been her RMD for 2020 (plus an insignificant amount of money that is not taxable). That will then be deposited into an IRA in her name at Fidelity. The 401k custodian will also issue a second check directly to my MIL for the small amount of non-taxable plus what would have been her RMD for 2020. No taxes will be withheld from that check. She was told since there is no IRS requirement to take an RMD for 2020 she could send a check in the amount of the RMD to the new Fidelity IRA.

My MIL was hoping to avoid having anything (or maybe just the small non-taxable amount) mailed directly to her but she was told by the custodian they cannot do that. Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?

Does this sound OK? It seems convoluted to me.

Full disclosure: My wife is actually helping her mother do this and I am providing my meager assistance.
You are correct. The plan knows there is no 2020 RMD required, but it sounds like their processing platform has not been updated to reflect this and perhaps they do not plan for it to be updated. They are correct that because this "would be RMD" is not really an RMD, it is eligible for rollover by MIL to her own IRA. She has 60 days from the date she receives the check to do this rollover, and because the check is from a qualified plan this rollover is not subject to the one rollover limitation. You said this check and perhaps other monies are after tax. As such they should be rolled to a Roth IRA, not to a TIRA.

If time permits, I would check to see if there is any highly appreciated employer shares in the plan eligible for NUA. And if there is any Roth 401k balance, there should be two direct rollover checks issued, one to each type of IRA.

As for naming HER beneficiary, she has a right to do that, but if the rollover is already in process it may not be worth the trouble. But if her health is not good or she contracts Covid or something, I would move fast to have her select a beneficiary for her interest in the plan just in case the worst happens before she can name a beneficiary on the rollover IRA.
Topic Author
JohnML
Posts: 32
Joined: Mon Dec 22, 2014 1:09 pm

Re: 401k Rollover Procedural Question

Post by JohnML »

Alan S. wrote: Wed Sep 16, 2020 2:58 pm
JohnML wrote: Tue Sep 15, 2020 2:03 pm My MIL is rolling her deceased husband’s 401k, of which she is the beneficiary, into an IRA in her own name at Fidelity. She wants to name her own beneficiaries which she cannot do as long as the money is in her husband’s old 401k. She will also receive a more favorable RMD factor with it being her own IRA.

The current custodian of the 401k told her they cannot send the entire balance of the 401k in a check directly to Fidelity. They told my MIL they would send a check directly to Fidelity for the amount in the 401k minus what would have been her RMD for 2020 (plus an insignificant amount of money that is not taxable). That will then be deposited into an IRA in her name at Fidelity. The 401k custodian will also issue a second check directly to my MIL for the small amount of non-taxable plus what would have been her RMD for 2020. No taxes will be withheld from that check. She was told since there is no IRS requirement to take an RMD for 2020 she could send a check in the amount of the RMD to the new Fidelity IRA.

My MIL was hoping to avoid having anything (or maybe just the small non-taxable amount) mailed directly to her but she was told by the custodian they cannot do that. Maybe the custodian is unwilling to make temporary changes to their computer systems to handle this for one year?

Does this sound OK? It seems convoluted to me.

Full disclosure: My wife is actually helping her mother do this and I am providing my meager assistance.
You are correct. The plan knows there is no 2020 RMD required, but it sounds like their processing platform has not been updated to reflect this and perhaps they do not plan for it to be updated. They are correct that because this "would be RMD" is not really an RMD, it is eligible for rollover by MIL to her own IRA. She has 60 days from the date she receives the check to do this rollover, and because the check is from a qualified plan this rollover is not subject to the one rollover limitation. You said this check and perhaps other monies are after tax. As such they should be rolled to a Roth IRA, not to a TIRA.

If time permits, I would check to see if there is any highly appreciated employer shares in the plan eligible for NUA. And if there is any Roth 401k balance, there should be two direct rollover checks issued, one to each type of IRA.

As for naming HER beneficiary, she has a right to do that, but if the rollover is already in process it may not be worth the trouble. But if her health is not good or she contracts Covid or something, I would move fast to have her select a beneficiary for her interest in the plan just in case the worst happens before she can name a beneficiary on the rollover IRA.
Thank you Alan S. As always, great information!

The bulk of her 401k transferred directly to her Fidelity Rollover IRA without a hitch. The check for my MIL's "RMD" plus after tax money arrived and my wife is mailing a check for the RMD portion to Fidelity today. Since MIL does not already have a Roth IRA and the after tax amount is so small (relatively) she is keeping that in her credit union account.

We checked on the NUA aspect last year and were told her account was not eligible. She missed the boat on that opportunity years ago.

Since the company 401k was actually still in her husband's name and she was the beneficiary, she could not add her own beneficiaries (we confirmed several times). But now her beneficiaries are set up at Fidelity (big sigh of relief).

Her health had been excellent up until a freak accident resulted in a broken pelvis. Thankfully she is recovering nicely now so the initial panic is over. But her family has taken this as a warning shot of how rapidly an 80+ year old's health can decline.

Everything is pretty much on track for now. I am sure I will be back with more questions. Bogleheads is a godsend!
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