When does a Beneficiary need take their money from a 401(k) after thei

[Guest TWR]

If a participant is age 69 when they die and their spouse is the beneficiary of their account in their 401(k) plan, when must the distribution be made from the account (either lump sum or annuity payments) in order to avoid paying a 50% penalty? As I understand 401(a)(9) they have two options: A. take a cash distribution by the end of the fifth year after the participants death (which would be the year that the participant would have reached age 74) OR B. start taking annuity payments by 12/31 of the year the participant would have turned 70 1/2.

I have been told that the 70 1/2 rule takes precedence over the 5 year cash rule. Is this true or can the spouse wait to take a full cash distribution until the 5th year? Am I missing something here?

[Dave Baker]

There's actually a wrinkle on the 5-year rule ... if the beneficiary starts taking distributions by the end of the FIRST year after the year in which the participant dies, then he or she can stretch out the distributions over his or her remaining life expectancy. The 5-year rule lets you wait until the 365th day of the fifth year after the year of death before actually withdrawing anything (but you have to withdraw everything on or before the last day of that fifth year).

I don't think there is any precedence rule between the 5 year/1 year option on the one hand and the woulda-been-70-1/2 option on the other. The beneficiary gets to pick.

But caution: what does the 401(k) plan say? It might not provide an option. It might say "everybody outta the pool by the end of the fifth plan year after the year of death."

[Dave Baker]

Here's another thought, submitted to me by another reader:

"Just in case the spouse in this situation is much younger than the 401(k) participant, you may want to follow up and let the person know that the spouse can also effect a direct rollover to his or her IRA, and thereby delay payments until they reach age 70 1/2 (or even forever if they convert

to a Roth IRA)."