A rollover from an inherited “traditional” (taxable) employer retirement plan, like a 401(k) account, to an inherited beneficiary traditional IRA account might be accidentally disqualified.
The rules for when payments are required to be made from employer retirement accounts, IRAs and Roths , called required minimum distributions or RMDs, are complicated. I’m just giving some basic information to highlight a problem for inherited retirement accounts.
According to final Treasury regulations, with some exceptions, when the account owner died after 2019, RMDs continue to made annually when the account owner dies after his or her required beginning date, with the balance of the account distributed during the year that includes the 10th anniversary of the death of the account owner.
In most cases, the required beginning date is April 1 of the year after the account owner reaches his or her applicable age. The applicable age is age 70 1/2 for individuals who reached that age before July 1, 2021, age 72 for individuals who reached that age from July 1, 2021 to December 31, 2022, age 73 for individuals who reach that age from 2024 to 2032, and age 75 for those who reach that age after 2034.
Continued RMDs with the balance payable during year 10 also apply for a successor beneficiary of an “eligible designated beneficiary” (EDB) when the account owner died after 2019 and the EDB later died after 2019. An EDB is a minor child of the account owner, a surviving spouse of the account owner, a beneficiary who is disabled or chronically ill, or a beneficiary who is not more than 10 years younger than the account owner.
Continued RMDs with the balance payable during year 10 also apply for a successor beneficiary of the designated beneficiary of a pre-2020 decedent account owner. The designated beneficiary of a pre-2020 decedent account owner is “grandfathered” under old distribution rules.
Note that Roth accounts don’t have a required beginning date — lifetime distributions aren’t required. (Lifetime distributions for designated Roth accounts in an employer plan, like a 401(k), have been repealed, effective 2024. A designated Roth account could have a required beginning date before 2024.)
Congress waived required minimum distributions for 2020 as COVID relief. There were no required minimum distributions for that year.
Since the requirement to continue making required minimum distributions after a death when the account owner died after 2019 and after the required beginning date was an unexpected change, the IRS waived penalties for failing to make distributions in the above scenarios for 2022 through 2024. (IRS Notices 2022-53, 2023-54, and 2024-35.)
Although the penalty doesn’t apply for failing to make RMDs during 2021 through 2024 in the above scenarios and no “make up” distributions are required, the amounts are still considered RMDs. For example, amounts actually distributed as RMDs for 2021 through 2024 weren’t eligible to be rolled over.
Perhaps more significantly, those previously-undistributed amounts apparently don’t qualify to be rolled over. For example, if a beneficiary of an inherited traditional 401(k) account wants to roll the account to an inherited beneficiary traditional IRA account, the previously-unpaid RMDs for 2021 through 2024 should be paid to the beneficiary before the rollover.
The IRS didn’t comment about future eligibility for rollovers in the Notices, so this could be questioned.
If you are the beneficiary for an inherited retirement account, consult with your tax advisor before going ahead with a rollover.
(Michael Gray, CPA is the co-author of How To Use Roth and IRA Accounts to Provide a Secure Retirement. To be notified when the 2025 Edition is released, please send an email to mgray@taxtrimmers.com with the subject: Roth IRA notice.)