This week, Ed dissects beneficiary designations and transfers from a 401(k) Roth.


Husband with large IRA, age 80+, second marriage, wife age 66. Upon death, husband wishes all income from IRA to second wife. At wife's death, IRA principal to Husband's family of nieces (no children). Question: how to set-up Beneficiary Designation for IRA?




Unfortunately, to accomplish the desired goal it’s going to take more than simply naming one or more persons on the beneficiary form. Once a beneficiary inherits an IRA, it’s theirs and they can do whatever they want with it. There’s no way to force them to take only a specified amount (other than the RMDs required under the law) and leave the rest for other beneficiaries. That can only be done by naming trust as the IRA beneficiary.

There’s a specific type of trust, known as a qualified terminable interest property (QTIP) trust, that’s often used in situations like the one you’ve described. It allows an individual to leave the income from their assets to a spouse and then, at the death of the surviving spouse, the remaining principle passes to the beneficiaries chosen by the original decedent. Usually it’s used to make sure children from a previous marriage aren’t disinherited, but it can work the same way in this case for your client’s nieces. If structured properly, the trust can qualify for the marital deduction (for estate tax purposes).

Naming a trust as an IRA beneficiary adds a number of complications to the planning process though – and for a host of reasons. Those complications are even further amplified by the use of a QTIP trust. Therefore, if this is an approach your client is serious about considering, they should make sure to consult with an attorney who specializes not only in estate planning, but also IRAs. The inherent complications of this strategy lead many clients to consider alternative approaches, such as leaving a portion of the IRA to the surviving spouse and a portion to the nieces outright.

Ed -

I am looking for a better understanding of the basis rules for transfers from a 401K Roth account to a Roth IRA account.  My company had a 401K Roth for about 3years until the entire plan was discontinued and the Roth 401K was then transferred to a Roth IRA - do I need to figure out my actual contributions to the Roth 401K for basis purposes and can this amount be withdrawn anytime vs waiting the 5 years since the start of the Roth IRA ?  Also, my wife has a 401K Roth account which we have quit contributing to.  If her plan allows in service withdrawals, is it better to wait until the Roth 401K has been in existence for 5 years, before transferring to a Roth IRA ?

Keith R. Jones


Great questions. First let’s tackle your own Roth IRA. It sounds like you moved your Roth 401(k) funds into a Roth IRA before five years had elapsed since your first Roth 401(k) contribution. If that’s the case, it means that only your 401(k) deferrals would have gone into your Roth IRA as basis. As basis, these amounts could be withdrawn at anytime tax and penalty free. Any gain on those contributions while in the Roth 401(k) would be treated as earnings in the Roth IRA. Withdrawals of those earnings before your distribution is a qualified distribution would make you subject to the 10% penalty and/or income tax.

Now, as for whether it makes sense to take an in-service distribution of your wife’s Roth 401(k) funds and move them to a Roth IRA... it’s really impossible to say without more information. When Roth 401(k) funds are moved to a Roth IRA, the five year qualified distribution clock from the Roth 401(k) does not transfer over. Instead, the five year qualified distribution clock for Roth IRAs starts with the first Roth IRA contribution. So in one respect, moving the Roth 401(k) funds sooner could work to your favor.

On the other hand, whether or not the Roth 401(k) distribution is qualified or not can impact how much of the distribution will qualify as basis if it is moved to a Roth IRA. If the Roth 401(k) distribution is qualified, everything goes into the Roth IRA as basis - if not, only the elective deferrals go in as basis, with the rest going in as earnings (like your case). In order for a Roth 401(k) distribution to be qualified, the distribution must be made after the Roth 401(k) five year clock has been satisfied AND the participant has reached age 59 ½, becomes disables or dies.

So bottom line, whether or not your wife should move her Roth 401(k) funds now depends a combination of factors including how old she is, how long she’s had her Roth 401(k), how long, if at all, she’s had any Roth IRA and how long she expects to wait until using the funds.

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