By Andy Ives, CFP®, AIF®
Good afternoon, Mr. Slott. I am trying to complete my taxes for last year, and the tax agent is stating that, because I had two 401(k) rollovers (each from a different employer), that I would be charged a penalty for one of these. Although I did receive checks for both rollovers, the monies were rolled over into a new 401(k) plan with my new employer within a week of receiving the checks, and none of it was used for any other purposes. If I remember correctly, both checks were made out to the new 401(k) plan provider “for the benefit of” myself to avoid a “direct” distribution situation.
Your article stated that 401(k) plans are exempt from the once per year rule. I just want to be certain that I didn’t do anything incorrectly that could have caused me NOT to be exempt from the rule so that I can advise and clarify with my tax agent regarding this. I definitely do not want to cause myself a tax issue later on because of incorrect filing. Would you have a moment to advise? Thank you in advance for any assistance you can provide.
Based on the transactions you described, you are free and clear of any tax or penalty issues. 401(k) plan-to-401(k) plan rollovers do not count against the one-rollover-per-year rule. (While you didn’t ask, I will note that neither do 401(k) plan-to-IRA rollovers, and neither do Roth conversions.) Even if the checks from the 401(k) plans were made payable directly to you, you still could have rolled them both over to the other plan or to an IRA. In fact, you did everything properly and can confidently “advise and clarify” with your tax agent.
What are the current “stretch” RMD rules for a Special Needs Trust that inherits an IRA? My understanding is that a disabled individual, or a trust established for that individual, can still use the lifetime stretch for RMDs when inheriting an IRA. Does it make a difference whether the trust is a primary or a contingent beneficiary? And does the lifetime stretch also apply to Roth IRAs as well as traditional IRAs?
Your understanding is correct. A beneficiary who qualifies as “disabled” is considered an “eligible designated beneficiary” and is permitted to stretch payments from an inherited IRA over their own single life expectancy. If an IRA names a special needs trust as beneficiary, and if the disabled person is the trust beneficiary, that person is still allowed to stretch payments. While the trust will be the owner of the inherited IRA, a properly drafted special needs trust will enable the trust beneficiary to stretch required minimum distributions. It does not matter if the trust was named as primary or contingent beneficiary, nor does it matter if the original IRA was a traditional or Roth. Both types of IRAs are allowed to be stretched through a special needs trust for a disabled trust beneficiary.