My mother left me her 401k which I still haven't touched since her passing (Nov 2014). From what I understand I should have done so within the first year to avoid higher tax consequences, however I did not learn of this until it was too late. The only other requirement I was told, was that it must be rolled over before the end of either the 4th or 5th year after her passing.

Can I still roll the full amount over at this point? Her former employer had a Pension Consultant company send me documents to fill out, but they included a letter stating I must receive a yearly Required Minimum Distribution (RMD) since the participant had attained age 70 1/2. She was only 66 years old when she passed, so I'm not sure why it states this, except for the fact that she would have been over 70 1/2 today, though I don't think that is how it works. Can anyone clarify? When I initially inquired about this plan a year or so ago, I was told I could roll it into an IRA, so I just want to make sure this is still the case.

Also, will her 401k amount count towards the maximum amount I can contribute to an IRA this year? I am working toward PSLF, therefore I am trying to minimize my AGI in every way allowable. Of course, I don't even have an IRA or 403b yet, but they are on my never ending to-do list.

Thanks in advance for any insight you can provide!

Sorry for your loss. Since she was older than the minimum retirement age you don't have to pay any penalty for distributions. You will have to pay all the federal and state (if any) taxes but the distribution is not considered income against your AGI - unless that has changed.

Because you weren't the spouse you should have taken the first required minimum distribution by December 31st of 2015.

The RMD is based on your age now. While there is no penalty you have to pay tax on the distribution.

I hate to be the bearer of bad news but the penalty for not taking the rmd is 50% of the required distribution.

Her retirement doesn't affect yours in any way. So you can contribute to whatever accounts you have. The RMD is taxed at ordinary income rates but it's unearned income

Step 1. Take the missed required distributions and pay the tax.

Step 2. Work with your CPA and/or the Taxpayer Advocate Hotline to determine best way to ask the IRS for leniency.

I've helped someone get the penalty waived, but it was only 1 year missed. I suspect it had a lot to do with the IRS agent we connected with through the hotline.

The sooner you take the distribution/pay the penalty, the sooner the bleeding stops. Hopefully the ultimate outcome will be better. Good luck!

For a little more detail

If you roll to an IRA it will be an inherited IRA. Not your personal IRA.

Also the RMD calculation looks like this. Of course this is an example.

The first RMD will be looking at the value of the account on 12/31/2014. Let's assume it was 100k for easy math.

Then you have this thing callled a single life table for inherited iras. I'm linking below.

http://www.jimhelps.com/wp-content/uploads/2013/07/SingleLifeTable-v.2.pdf

You take your age at the end of 2014. Let's assume you are 50 on 12/31/14. So your life expectancy is 34.2 years.

Now to calculate RMD the math is 100,000/34.2=2,923.97. And the penalty for not taking it is $1461.99.

The next year your life expectancy is reduced by one. You take the 12/31/15 value and divide by 33.2.

So I hope you can get some forgiveness on the penalty. If it was a larger amount of if you are older it can get pretty darn steep.

The IRS is pretty lenient on penalizing this sort of thing.

It appears that you "accidentally" chose the full distribution by Dec 31st of the 5th year of death.

You may be able to still roll it into an inherited IRA, but then you are facing the 50% penalty for the years you didn't draw on it (2015-2017). The penalty is 50% of the amount you were supposed to take out. Rolling it may not be an option due to the penalty size or the 401k may have already coded it as a total distribution. The IRS is lenient on the penalties if you write a letter and explain your situation. However, they may say no due to the conversation you had with the 401k company initially.

This can get confusing, so you can always email me or call if you have questions.

The distribution will count on your AGI if you are named as the beneficiary on the 401k.

oldarmy1 said:

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Sorry for your loss. Since she was older than the minimum retirement age you don't have to pay any penalty for distributions. You will have to pay all the federal and state (if any) taxes but the distribution is not considered income against your AGI - unless that has changed.

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Just to clarify: since it's inherited there is never any 10% penalty for early withdrawal. No matter how old he is or how old his mom was when she passed.

nactownag said:

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oldarmy1 said:

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Sorry for your loss. Since she was older than the minimum retirement age you don't have to pay any penalty for distributions. You will have to pay all the federal and state (if any) taxes but the distribution is not considered income against your AGI - unless that has changed.

---

Just to clarify: since it's inherited there is never any 10% penalty for early withdrawal. No matter how old he is or how old his mom was when she passed.

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Was that a change in recent years? I recall a conversation with my planning group on this and they said something about 59.5 years old being a trigger number. Maybe I'm thinking of a different investment vehicle?

oldarmy1 said:

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nactownag said:

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oldarmy1 said:

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Sorry for your loss. Since she was older than the minimum retirement age you don't have to pay any penalty for distributions. You will have to pay all the federal and state (if any) taxes but the distribution is not considered income against your AGI - unless that has changed.

---

Just to clarify: since it's inherited there is never any 10% penalty for early withdrawal. No matter how old he is or how old his mom was when she passed.

---

Was that a change in recent years? I recall a conversation with my planning group on this and they said something about 59.5 years old being a trigger number. Maybe I'm thinking of a different investment vehicle?

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You're thinking of it being your own personal IRA account or 401k which is typically age 59.5 to avoid the 10% early withdrawal penalty. When it is inherited the penalty is waived no matter the age. You still owe taxes of course, but no penalty.

Thank you sir! Yup - All of mine are through my own companies so that clears that up.