Can’t Use Non-Spouse Inherited IRA or 401k Funds to Finance a ROBS 401k

QUESTION: 

I have an IRA account with Fidelity that I inherited from my mother? That only has $29,000 and it and I would like to use it to start an online video editing business with. I would like to use this money in the IRA to help me get started.

ANSWER:

Good question. Unfortunately, the IRA rules do not allow for the transfer/rollover of an IRA that was inherited from a non-spouse to a 401k plan including the ROBS 401k.  Instead, and beginning in tax year 2020  the following rules apply to IRAs inherited from a non-spouse:

  • Yes the SECURE Act changed the distribution rules for IRAs inherited by non-spouse beneficiaries starting in 2020. Other than those non-spouse beneficiaries who are disabled or chronically ill, most beneficiaries will be required to empty out the inherited IRA within 10 years (known as the 10 year rule).
  • This means the inherited IRA will need to be fully distributed by December 31st of the tenth year following the IRA owner’s year of death.
  • The non-spouse beneficiary is not required to take distributions over the 10 year period and can wait until the end of the tenth year to take the full required distribution.
  • If the beneficiary is a minor, they will be able to wait until they reach the age of majority under state law or finish school (no later than age 26) before the 10 year rule commences.
  • However, the 10 year rule will still apply to grandchildren unless they are disabled or chronically ill.
  • The 10 year rule also applies to Roth IRAs.
  • A 50% tax penalty applies to those non-spouse beneficiaries who do not fully distribute the inherited IRA by the end of the 10 year period.
  • Spouse beneficiaries are not subject to this new 10 year rule, and can distribute the IRA over their lifetime.
COMPLIANCE NOTE:  It’s important to note that the new 10 year rule for non-eligible designated beneficiaries under the Setting Every Community Up for Retirement Enhancement (SECURE) Act is not affected by this CARES Act provision. The 10-year period applies only to certain beneficiaries for deaths in 2020 and later years. If an IRA owner dies in 2020, the 10-year period would not start until 2021, the year after the year of the IRA owner’s death.

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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