Author Topic: Fidelity 401k for Widow Questions  (Read 859 times)

Loren Ver

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Fidelity 401k for Widow Questions
« on: January 26, 2022, 06:13:26 AM »
Hello All,

I am helping out someone that was very recently widowed (55 yo) and the information is slowly trickling in.  It is making a large plan hard, but it is giving me a chance to double check information before speaking which is a plus.  Widow handled none of the finances and needs things to be automated.

The deceased husband had a good amount of money 400k in a Fidelity 401k.  Fidelity has really been the only company that's actually be doing a good job getting back to her on numbers and account information (the life insurance has been a bear-still no real movement there).

So my biggest question is, is the account handled any differently as an (correct word?) inheritance? Beneficiary?  Not originally hers but now hers due to death?

Can it still be rolled into an IRA, then if the right plan is a Roth can we still do that?  Or does something change since it came due to a death? 

Next question: what to do with the money.  I think staying with Fidelity is fine.  Based on a screen shot she sent me, he is in:

FID OTCK 19%
FID INVST GR BD 16%
FID DIVERSFD INTL K6 (might be K8 fuzzy screen) 14%
FED Low Priced ST K6 (might be K8) 13%
FID GLB EX US IND 10%
Other 25%

So,
Domestic 45
Foreign 30
Bond 20
Short 3
Other 1

He's far more diverse than I am :).  I'd like to do as little messing around with his balance as possible if it is a good mix already.  Ideally, I'd like to just slide it over directly, but I am not familiar with these funds.     

If the mix is very egregious, I want to fix it so it can just live its best life in a new configuration (assuming that's what the widow wants).  We call Fidelity Thursday, so I'm gathering my intel prior.  I know fidelity has a total market fund (that I can't recall??), but if deceased husband built something good, I don't need to go mucking it up in the name of good intentions.

Thoughts appreciated!

Loren

Mouse21

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Re: Fidelity 401k for Widow Questions
« Reply #1 on: January 29, 2022, 10:52:51 AM »
As a recent widow myself, this post is finally going to get me to unlurk.

Does she need the money now? As a spouse, she has the option to withdraw the money without the early withdrawal penalty (taxes would still need to be paid). As long as the money stays in the beneficiary 401k or is transferred to an inherited IRA, there is no 10% early withdrawal penalty and she could take disbursements now. There is also no requirement to disperse it all within 10 years. In this case RMDs start based on husbandís age, but the amount is based on the widowís age.

If she doesnít need to touch the money, then she can transfer it into a 401k or traditional IRA in her own name. Once this is done, itís as is she contributed it all. Early withdrawal penalties apply again but RMDs donít start until she turns 72.

As a fairly young widow, I left my husbandís in a beneficiary 401k so I can withdraw from it whenever I need to. I have my own 401k that is well funded for retirement already and am not worried about RMDs starting a few years earlier on his account.

secondcor521

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Re: Fidelity 401k for Widow Questions
« Reply #2 on: January 29, 2022, 11:19:06 AM »
Pub 559 from the IRS indicates that she can roll it over tax free to a number of different destinations:

"Rollover distributions. An employee's surviving spouse who receives an eligible rollover distribution may roll it over tax free into an IRA, a qualified plan, a section 403 annuity, or a section 457 plan. For more information, see Pub. 575, Pension and Annuity Income, and Form 4972, Tax on Lump-Sum Distributions."

-- https://www.irs.gov/publications/p559

Since the amount is sizeable, as @Mouse21 said, she probably can leave it in her husband's plan as well.  (If it were a small amount, the employer might have rules that they could force a disbursement, which would probably best be handled as a rollover distribution above.)

I think if she rolled it into an IRA, it might be treated as an inherited IRA at that point.  If so, she would *not* be eligible to perform Roth conversions from an inherited IRA.

I'm not 100% sure I agree that she would not be required to drain the account within 10 years.  That may have been true for @Mouse51, but I think in general it depends on a number of factors.  Pub 590-B would contain information about IRA distributions requirements and whether she would be subject to a 5-year, 10-year, or lifetime-RMD-type requirement.

As far as investment AA goes, it should be invested according to the widow's goals, facts, and circumstances, which may very well now be different than her husband's goals, facts, and circumstances when he was alive.

Sorry the life insurance people are being a pain.  There should be some state or federal agency which supervises them, and a phone call of complaint may get things rolling along there.  As a point of reference, my Mom's life insurance proceeds were deposited into my account about 49 days after she died, but we were pretty organized.

secondcor521

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Re: Fidelity 401k for Widow Questions
« Reply #3 on: January 29, 2022, 11:22:23 AM »
Pub 559 from the IRS indicates that she can roll it over tax free to a number of different destinations:

"Rollover distributions. An employee's surviving spouse who receives an eligible rollover distribution may roll it over tax free into an IRA, a qualified plan, a section 403 annuity, or a section 457 plan. For more information, see Pub. 575, Pension and Annuity Income, and Form 4972, Tax on Lump-Sum Distributions."

-- https://www.irs.gov/publications/p559

Since the amount is sizeable, as @Mouse21 said, she probably can leave it in her husband's plan as well.  (If it were a small amount, the employer might have rules that they could force a disbursement, which would probably best be handled as a rollover distribution above.)

Whether she keeps it in her deceased husband's name or rolls it over can affect her subsequent choices, so care should be taken to understand all her options and the consequences thereof before making a move.  For example, if she rolled it into an IRA, I think it would be treated as an inherited IRA at that point.  If so, she would *not* be eligible to perform Roth conversions from an inherited IRA.

I'm not 100% sure I agree that she would not be required to drain the account within 10 years.  That may have been true for @Mouse51, but I think in general it depends on a number of factors.  Pub 590-B would contain information about IRA distributions requirements and whether she would be subject to a 5-year, 10-year, or lifetime-RMD-type requirement.

As far as investment AA goes, it should be invested according to the widow's goals, facts, and circumstances, which may very well now be different than her husband's goals, facts, and circumstances when he was alive.

Sorry the life insurance people are being a pain.  There should be some state or federal agency which supervises them, and a phone call of complaint may get things rolling along there.  As a point of reference, my Mom's life insurance proceeds were deposited into my account about 49 days after she died, but we were pretty organized.  I also recall the company offering several different options for them to hold on to those proceeds before us being able to say, "No, please just send us a check."

terran

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Re: Fidelity 401k for Widow Questions
« Reply #4 on: January 29, 2022, 01:42:59 PM »
Here's a good explanation of the various options when one inherits an IRA: https://www.wealthspire.com/blog/inherit-ira-post-secure-act/

Whatever you do, don't have the whole $400k rolled over to a Roth IRA in one year (unless it's a Roth 401(k) of course) as that would be a big unnecessary tax bill.
« Last Edit: January 29, 2022, 01:45:39 PM by terran »

DaMa

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Re: Fidelity 401k for Widow Questions
« Reply #5 on: January 29, 2022, 02:52:22 PM »
I had the option of rollover into an inherited IRA or into my IRA.*  I choose the 2nd so I could doing Roth conversions.  The inherited IRA requires annual disbursements, which would have reduced my ability to do Roth conversions from the IRA I already had.  This decision is very dependent on her situation, though.  I did some modeling to decide what worked best for me.

I had A LOT of problems with the people I had to work through at my husband's employer.  I was repeatedly given incorrect information.  They sent the wrong amount to the life insurance company, which would have been $40k less if I hadn't caught it.  Double check everything!

*I would not opt to leave the 401k in the husband's name and managed by the employer.  There could be fees being taken that she may not see.  (Plus, I wouldn't leave anything to be managed by THAT employer.)

Loren Ver

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Re: Fidelity 401k for Widow Questions
« Reply #6 on: January 29, 2022, 07:04:40 PM »
Thank you all for your help and replies.

After being on hold for almost 2 hours we opted to roll the 401k from his name into a new IRA and we made in her name.  This should give us the most options moving forward.   She has no other 401ks, IRAs, or other investments that I am aware of (just bank accounts and credit cards).  Her son (just turned 17 last week) has a 529 (not with Fidelity).  He is a sophomore in high school (a few years behind due to high functioning autism).

Husband was 52 when he died, so younger than widow (she is 54 not 55 like I had listed in original post)

We are meeting again on Tuesday to talk to Fidelity about the asset allocations (free service).  Widow has some mental limitations which makes trying to figure out what her longer term goals are rather difficult (she is very easily distracted, likes to discuss simple things only etc.).  Taking into account her circumstances, facts, and what I can discern of her goals... asset preservation should be high, then growth.  She is not going to be moving money into different investment over time, once it is set, she will leave it alone.  I have explained to her that the market is down right now (but it will go back up), that's why there is less money than when she looked a few weeks ago, but I'm not sure how much she understands.  She trusts me, but it unsettles her. 

So I need to find an asset allocation that isn't too volatile, but will allow the money to continue to grow, and will also be able to continue without changes as she gets older and moves into pulling out money (either at 59.5 or 72).

Looks like the private life insurance was paid for Feb of 2021 for the year, so a policy should exist.  The widow remembers it being for 500k, which doesn't sound unreasonable.  She filed a claim.  Company said it will be at least 4 weeks to review the claim then 4 weeks to send money (IIRC). 

The life insurance through work is still stalling out, HR is working on it.  It is 1x salary.  So enough to pay off the house (what she wants to do really badly) and then have some living money.

Between the life insurance and 401k --> IRA she should have enough to live on forever (given the lifestyle I've observed), but those kinds of conversations are kind of beyond her.  But maybe with enough simple conversations I can get the idea across and she can live her life the way she wants to . 

secondcor521

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Re: Fidelity 401k for Widow Questions
« Reply #7 on: January 29, 2022, 07:20:54 PM »
I don't think you've mentioned your relationship to this widow yet.

I used to be fairly cautious about giving advice, for several reasons.  First, it's rare that I know all of a person's situation.  Second, I'm not a professional.  I know a lot about a lot of things and am usually pretty good, but there's stuff I don't know and am not required to know.  Third and most importantly, giving advice can easily come with the consequence that if the advice is followed and things turn out more poorly than expected, the person following the advice can blame the advice giver.  This can damage any underlying relationship.

I've since relaxed on following my own rule recently out of laziness, but I think it would be better for me if I followed it more strictly.

I think it's nice and kind of you to help her.  It sounds like she needs help.  It also sounds like she might be of limited means and mental capacity so your help might very well be good bang for her unspent buck.  But if I were in your shoes, I would contemplate and perhaps even discuss with her openly and honestly the third point above and make sure you're both OK with that.

...

If it's now in an IRA in her name only, she'll have penalty-free access at age 59.5.

If it's now in an inherited IRA in her name, she will have distribution requirements of some type as mentioned previously.

To distinguish between the two, look at the account titling.  If it mentions the husband's name and the fact that it is inherited, then it's an inherited IRA.  If it doesn't, then it probably isn't an inherited IRA.

Paying off the house and having a conservative asset allocation given what you've written about her seems very appropriate to me.

Loren Ver

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Re: Fidelity 401k for Widow Questions
« Reply #8 on: January 30, 2022, 09:03:37 AM »
I never mentioned the relation because there really wasn't one prior to about three weeks ago.  My church pastor and the principal to the school where the autistic son use to attend (attached to the church) asked me to assist if I could after the husband died.  The widow is very trusting and can easily be taken advantage of.  They knew I was decent with paperwork, finances, and wouldn't take advantage of her, nor let her be taken advantage of if I could prevent it. 

I've made sure to tell her (multiple times) that I am not a professional, I just have some experience so I like to help.  She still needs to make the decisions she is comfortable with. 

Her step-dad that she hasn't spoken to in 10 years due to other family issues told her to use his advisor at Fidelity that charges 1% per year and earns him 10%.  That's the kind of help I am trying to avoid, unless there are no better options.

Loren