Death of 401k owner

L1: Death of 401k ownerI havea young couple. The husband passed away at age 45. The wife is age 43.
The 401k plan insists that because of husband’s death, she can withdraw the 401k without penalty (but with taxes) in a lump sum.
Is this correct? Is it some hardship exemption? 2005-07-25 16:29, By: Mobey, IP: [67.106.28.17]

L2: Death of 401k ownerHi Mobey:
Yes, the widow(assuming she is the sole beneficiary)can withdraw the K-plan money without a penalty and only pay taxes on the part not rolled over to an IRA.
Is it some hardship exemption? Yes, I would say you could classify this as a “hardship” since the deceased plan owner has a hard time breathing. Death is an exemption to the penalty rules.
Before making a total distribution do some planning. Do you want to set up a withdrawal plan from the K-plan for the entire amount or make a partial distribution along with a withdrawal plan? If the widow is the sole beneficiary she can transfer the entire amount to a “Beneficiary IRA” which would give her more options than transferring the funds to an “Individual IRA” in her name.
Death distributions is a somewhat complicated situation, and needs to be planned out carefully. Get some really expert advise for your situation and get her CPA and maybe attorney involved.
Jim2005-07-26 10:21, By: Jim, IP: [70.184.1.35]

L2: Death of 401k ownerDEFINITELY PLAN BEFORE DOING ANYTHING. The other response is great advice. Discuss all options with a tax advisor (CPA, PA, EA) and the Estate Attorney. This is a very tricky area, and can be very costly if not done right.
There are significant differences between keepingthe investment inthe 401-K plan (IF THE COMPANY PERMITS IT), setting up an “annuity” type of payout from the 401-k plan (IF THE COMPANY PERMITS IT), or rolling it over to the surviving spouse’s IRA or into a PROPERLY NAMED “BENEFICIARY IRA”. ( The 401-K plan may not permit the surviving spouse to continue the investment in their plan, and may require the entire balance to be DISTRIBUTED, which is different than a ROLLOVER. A DISTRIBUTION is a check drawn to the BENEFICIARY, who in turn must set up the appropriate IRA and deposit the check, or the same amount, into the account within 60 DAYS. Often companies will not permit a direct rollover to an account for someone other than the employee, not even to a surviving spouse’s IRA or BENEFICIARY IRA.
In this case you do not have to worry about any REQUIRED MINIMUM DISTRIBUTION, but, in general, for older persons, if the employee dies after age 70 1/2, then the RMD must be withdrawn by the beneficiary if the employee had not already taken it in the calendar year before the balance can be moved to another account. ( It is taxable income to whomever gets the RMD withdrawal.)
An excellent source of information on the nuances of inherited IRA’s and retirement plans is the book by ED SLOTT, who is “The IRA Advisor”, and his monthly newsletter. (I don’t remember the name of the book.) Call 1-800-663-1340, or www.irahelp.com2005-07-26 10:44, By: dlztaxes, IP: [4.175.9.93]

L2: Death of 401k ownerThanks dlztaxes for your additional comments. Death Distributions could be a web-site subject by itself given all of the twists and turns.
Edd Slott, CPA, is a great resource. In fact, there is a link to Ed’s site on the front page of this site … 3rd blue button from the top on the right side. Ed’s book is, ‘The Retirement Savings Time Bomb … and How to Defuse It’ and it’s a great resource. Another resource is ‘The Plain English Guide to IRA Distributions’ by The IRA Doctor, Leo Martin at 800 255-2593. Leo gives some really great sample scenarios for all types of distributions from IRA’s.
Jim2005-07-26 10:58, By: Jim, IP: [70.184.1.35]