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Open IRA in decedent's name...


chris
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Surviving spouse is considerably younger than 59 1/2. Surviving spouse is designated beneficiary on decedent's acct. balance in PSP. Surviving spouse needs to be able to take advantage of 72(t)(2)(A)(ii) exception to 10% penalty tax. Would it be possible for the surviving spouse to open an IRA in the name of the decedent and roll over the qual plan benefits? Anyone know of financial institutions which will allow for the opening of an IRA in the name of the decedent?

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Guest LVanSteeter

Please correct me if I am mistaken, but can't the surviving spouse take the monies and roll them into an IRA in her name?

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Yes, the widow could roll them over into her own name but then any withdrawals from the IRA would be subject to the 10% penalty or she would have to use some other means of taking the money out that avoids penalty.

If she can open an IRA in the decedent's name, that's best.

Mary Kay Foss CPA

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Under the heading "Other options"

Money is on sale right now. On possible option to avoid the under 59 1/2 problem would be to look at home equity or perhaps refinancing. You might be able to take out some funds using a refinance cash out to bridge the gap to when you can take normal IRA distributions. There were some 10 and 5 year home equity loans advertised in Colorado today with a 2.9% rate. That is probably a short term teaser, but it is certainly something to consider. I think the 10% penalty (if it applies) would certainly make some of the very low cost loan options look awfully attractive.

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Under the Plan's distribution provisions it looks like decedent's account balance will have to be distributed by 12/31 of the calendar year containing the fifth anniversary of decedent's death. Based on the facts that's 12/31/04. Thus, exploring alternatives...

Also, I ran across a few PLR's allowing for the rollover of a decedent's IRA into a new IRA in the name of the decedent. However, I have not seen any guidance on whether an IRA can be opened in the first instance in the name of decedent. Here, the decedent's acct. balance would be distribued and rolled to an IRA in the decedent's name with spouse as the beneficiary. Again, I don't know that this can be done under these facts...

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I dont believe that an IRA can be opened by a legal representative of a decedent in the decedent's name. I think all IRA custodians require that the owner open the account.

However, I dont know why the spouse cannot leave the account balance in the plan until she turns 59 1/2 and take withdrawals as needed unless the plan requires a distribution upon death. I thought the spouse could defer commencing distributions until the year the employee would attain age 70 1/2. You need to read the plan document.

mjb

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As I said above I had seen the few PLR's allowing for an IRA to be opened in the name of the decedent in order to receive a rollover from an IRA which the decedent maintained prior to death, but that I hadn't seen anything regarding the surviving spouse setting up an IRA in the name of the decedent. However, I ran across the following in some of RIA's research materials:

RIA illustration: Husband dies at age 47 with $300,000 in his employer-funded qualified plan account. Wife, age 44, is the designated beneficiary of the account, and must set aside $100,000 of her husband's retirement plan funds to pay for pre-age-59-1/2 expenses (e.g., her children's college tuition). Using trustee-to-trustee transfers, Wife can transfer her husband's plan account balance into two IRAs in his name (with herself as beneficiary). IRA A will receive $200,000, and IRA B will get $100,000. She then withdraws all of the money in IRA A and within 60 days rolls it over into IRA C, which she opens in her name. Wife then proceeds to withdraw money as needed from IRA B.

The example was based on PLR's 9608042 and 9418034.

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Guest LVanSteeter

It sounds like the surviving spouse needs to consult with a financial planner.

How much of the deceased account does she need? When?

Could she roll into an IRA in her name and then set up Substantially Equal Payments?

What about rolling over part of the account and taking some in cash (of course, the 10% penalty applies to the cash portion)?

Just some thoughts. . .

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My belief is that the spouse CAN open an IRA in the decedent's name. It most likely is her best alternative, although other options have been mentioned.

My guess is that the custodian will not open the account until you show up with your own private letter ruling. However, you may get lucky and find a custodian who will open such an account.

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Chris: I think that the rulings you cited were issued to allow an IRA opened before the owner died (and naming the spouse as the beneficary) to be divided into two or more IRAs in the name of the deceased owner at the request of the spouse. Under the rules for custodial IRA accounts the beneficiary suceeds to all rights under the IRA that the IRA owner had, including the right to divide the IRA. I would be interested in any IRS ruling that alllows the surviving spouse who is the beneficiary of a participant's interest in a qualified plan to make a tax free rollover to an IRA issued in the name of the deceased participant naming the spouse as beneficiary.

mjb

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Maybe this falls in line with your point regarding the IRA beneficiary's succeeding to the rights of the deceased IRA owner, but in the facts of PLR 9842058 the surviving spouse set up an IRA after decedent's death in the name of decedent with the surviving spouse as the beneficiary. The surviving spouse then transferred two of decedent's pre-death IRA's by way of a trustee-to-trustee transfer into the post-death established IRA. The PLR doesn't address the post-death IRA in decedent's name other than to assume that it met the requirements of 408(a).

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Trustee to trustee transfers of IRAs are permitted under Rev. Rul 78-406. An IRA can alawys be divided by the owner. Under the PLRs cited, a surving spouse who is the beneficary of the IRA can request that the IRA be divided into two or more IRAs in the name of the deceased owner as an inherited IRA. However, I do not know of any ruling that allows the spouse beneficary to make a tax free rollover from a Q plan to an IRA to be established in the name of the decedent participant. Also I dont believe that the transfer can be made by a trustee to trustee transfer in Rev. rul 78-406.

mjb

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Here is 9418034 It appears to allow the spouse beneficiary of a Qualified plan to Roll the plan in the name of a decedent and then allow death distributions to the spouse beneficiary.

4973.02-00

Tax on excess contributions to IRA's, certain 403(B) contracts, and certain individual retirement annuities

Excess contributions

UIL No. 72.22-00; UIL No. 401.06-01; UIL No. 402.08-05 Taxability of beneficiary of employee's trust, Rollover contributions, By a surviving spouse; UIL No. 4973.02-00 Tax on excess contributions to IRA's, certain 403(B) contracts, and certain individual retirement annuities, Excess contributions

This is in response to the *****, request for private letter ruling submitted by your authorized representative on your behalf, as supplemented by letters dated, ***** and, ***** in which you request several letter rulings under sections 72(t), 401(a)(9), 402©(9), and 4973 of the Internal Revenue Code. The following facts and representations have been submitted in support of your ruling request.Taxpayer A died on *****, survived by his spouse, Taxpayer B. Taxpayer A's date of birth was September *****, and he had not attained age 70 1/2 at the time of his death. Taxpayer B's date of birth was *****.At the time of his death, Taxpayer A was a participant in Plan X, a profit-sharing plan which your authorized representative has asserted is qualified under section 401(a) of the Code, and the trust of which is tax-exempt under section 501(a).At the time of his death, Taxpayer A also maintained an individual retirement arrangement (IRA Y) described in section 408(a) for his benefit. Taxpayer B is the beneficiary of IRA Y. Taxpayer A had not begun to receive distributions from either Plan X or IRA Y at the time of his death.IRA Y is maintained with a brokerage firm. Since the firm does not hold assets of the type found in Taxpayer A's account in Plan X, the brokerage firm will be directed to transfer Taxpayer A's IRA Y account balance to IRA Z which will be held with a bank. IRA Z will be in Taxpayer A's name. Taxpayer B will be the beneficiary of IRA Z.Under the terms of Plan X, Taxpayer B is entitled to a preretirement survivor annuity. As beneficiary of Taxpayer A's interest in Plan X, Taxpayer B intends to elect to receive a single sum distribution of the present value of her pretirement survivor annuity. Thereafter, Taxpayer B intends to direct the trustee of Plan X to transfer said present value into IRA Z in a trustee-to-trustee transfer described in section 401(a)(31) of the Code. No portion of said amount consists of after-tax contributions to Plan X. Taxpayer B does not intend to treat IRA Z as her own IRA as permitted under section 1.408-8 of the Proposed Income Tax Regulations, Questions and Answers A-4 and A-6.Taxpayer B intends to begin receiving distributions from IRA Z. Both the transfer of amounts into IRA Z and the commencement of distributions from said IRA will occur prior to December 31, 1994.1. That the amounts directly transferred from Plan X to IRA Z may be excluded from Taxpayer B's income as a rollover contribution from a qualified retirement plan to an IRA pursuant to sections 402©(9) and 401(a)(31) of the Code;2. That the amounts transferred to IRA Z will not constitute an excess contribution under section 4973 of the Code;3. That distributions from IRA Z to Taxpayer B made prior to Taxpayer B's attaining age 59 1/2 will not be subject to the 10 percent additional income tax imposed by section 72(t)(1) of the Code because of section 72(t)(2)(A)(ii) of the Code; and4. That IRA Z will be treated as Taxpayer A's IRA and, thus, will be subject to the distribution rules of sections 401(a)(9)(B)(iii) and (iv) of the Code.With respect to your first ruling request, section 402(a) of the Code provides that, except as otherwise provided in this section, any amount actually distributed to any distributee by any employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities).Section 402©(1) of the Code provides, generally, that if any portion of an eligible rollover distribution from a qualified trust is transferred into an eligible retirement plan, the portion of the distribution so transferred shall not be includible in gross income in the taxable year in which paid.Section 402©(4) of the Code defines "eligible rollover distribution" as any distribution to an employee of all or any portion of the balance to the credit of an employee in a qualified trust except the following distributions:(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made--(i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee's designated beneficiary, or(ii) for a period of 10 years or more, and(B) any distribution to the extent the distribution is required under section 401(a)(9).Section 402©(8) of the Code defines an eligible retirement plan as (i) an individual retirement account described in section 408(a), (ii) an individual retirement annuity described in section 408(B) (other than an endowment contract), (iii) a qualified trust, and (iv) an annuity plan described in section 403(a).Section 402©(3) of the Code provides, generally, that section 402©(1) shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed.Section 402©(9) of the Code provides, generally, if a distribution attributable to an employee is paid to the spouse of the employee after the employee's death, section 402© of the Code will apply to such distribution in the same manner as if the spouse were the employee except that the spouse shall transfer such distribution only to a section 408(a) individual retirement account or a section 408(B) individual retirement annuity.Section 401(a)(31)(A) of the Code provides that a trust shall constitute a section 401(a) qualified trust only if the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution--(i) elects to have such distribution paid directly to an eligible retirement plan, and(ii) specifies such eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe),such distribution shall be in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified.Section 401(a)(31)(B) of the Code provides that subparagraph (A) shall apply only to the extent that the eligible rollover distribution would be includible in gross income if not transferred as provided in subparagraph (A) (determined without regard to sections 402© and 403(a)(4)).The term "eligible rollover distribution" when used in section 401(a)(31) of the Code has the same meaning as when used in section 402© of the Code.The term "eligible retirement plan" when used in section 401(a)(31) of the Code includes IRAs defined in sections 408(a) and 408(B) of the Code.Generally, a direct trustee-to-trustee transfer described in section 401(a)(31) of the Code constitutes a "direct rollover" of an "eligible rollover distribution" and is entitled to tax-deferred treatment pursuant to section 402© of the Code.Section 1.402©-2T of the Temporary Income Tax Regulations, Question and Answer 10, provides, generally, that if a distribution attributable to an employee is paid to the employee's surviving spouse, sections 402© and 401(a)(31) apply to the distribution in the same manner as if the spouse were the employee. Q&A 10 further provides that only IRAs described in sections 408(a) and (B) of the Code are treated as eligible retirement plans for purposes of receiving distributions made to surviving spouses of deceased employees/plan participants.Section 1.408-8 of the proposed regulations, Question and Answer A-6, provides, in pertinent part, that a surviving spouse of an employee who rolls over a distribution from a section 401(a) qualified plan into an IRA may elect to treat the IRA as the spouse's own IRA in accordance with the provisions of Q&A A-4.Section 1.408-8 of the proposed regulations, Q&A A-4, provides that a surviving spouse is the only individual who may elect to treat a beneficiary interest in an IRA as the beneficiary's own account. Q&A A-4 further provides, in pertinent part, that an election will be considered to have been made by a surviving spouse if either of the following occurs: (1) any required amounts in the account (including any amounts that have been rolled over or transferred, in accordance with the requirements of section 408(d)(3)(A)(i), into an IRA for the benefit of such surviving spouse) have not been distributed within the appropriate time period applicable to the decedent under section 401(a)(9)(B), or (2) any additional amounts are contributed to the account (or to the account or annuity to which the surviving spouse has rolled such amounts over, as described in (1) above) which are subject, or deemed to be subject, to the distribution requirements of section 401(a)(9)(A). The result of such an election is that the surviving spouse shall then be considered the individual for whose benefit the trust is maintained.In this case, Taxpayer B will receive, or be treated as having received, a distribution of the full amount due her from Plan X. She will then roll over, or transfer pursuant to section 401(a)(31) of the Code, the distribution into IRA Z. She does not intend to make the election described in section 1.408-8 of the proposed regulations, Qs and As A-4 and A-6.Q&A A-6 of section 1.408-8 of the proposed regulations provides that a surviving spouse may elect to treat an IRA of her deceased's spouse as her own. Q&A A-4 lists the actions by which a surviving spouse makes said election. The cited questions and answers indicate that a surviving spouse's rolling over a distribution from a deceased's employee's qualified retirement plan into his IRA in and of itself need not constitute an election to treat the IRA as her own.In this case, Taxpayer B will accomplish a direct rollover of the amount due her from Plan X into IRA Z. Your authorized representative has asserted that said rollover will meet the requirements of sections 402©(9) and 401(a)(31) of the Code. After the rollover is accomplished, IRA Z will continue to be maintained in the name of Taxpayer A as Taxpayer B will not affirmately elect to treat IRA Z as her own IRA. We believe that such a scenario is described in section 402©(9).Therefore, with respect to your first ruling request, we conclude as follows:1. That the distribution from Plan X to IRA Z may be excluded from Taxpayer B's income as a rollover contribution from a qualified retirement plan to an IRA pursuant to sections 402©(9) and 401(a)(31) of the Code.With respect to your second ruling request, section 4973(a) of the Code provides, generally, that with respect to individual retirement accounts (within the meaning of section 408(a)) and individual retirement annuities (within the meaning of section 408(B)), there is imposed for each taxable year a tax in the amount equal to 6 percent of the amount of the excess contributions to such account or annuity (determined as of the close of the taxable year). The amount of such tax for any taxable year shall not exceed 6 percent of the value of the account or annuity (determined as of the close of the taxable year).Section 4973(B)(1) of the Code defines, in relevant part, the term "excess contributions" as the sum of--(1) the excess (if any) of--(A) the amount contributed for the taxable year to the accounts or for the annuities (other than a rollover contribution described in section 402©, 403(a)(4), 403(B)(8), or 408(B)(3)) (should be section 408(d)(3), over(B) the amount allowable as a deduction under section 219 for such contributions.In short, an amount distributed from a section 401(a) of the Code qualified retirement plan and contributed to an IRA which is not described in section 402© is an excess contribution for purposes of section 4973.We concluded with respect to your initial ruling request that Taxpayer B's proposal to "roll over" her Plan X distribution into IRA Z falls within the scope of section 402©(9) of the Code. Thus, with respect to your second ruling request, we conclude:2. That the amounts transferred to IRA Z will not constitute an excess contribution under section 4973 of the Code;With respect to your third ruling request, section 72(t)(1) of the Code provides that if any taxpayer receives an amount from a qualified retirement plan (as defined in section 4974©), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.Section 4974© of the Code defines "qualified retirement plan" to include individual retirement accounts described in section 408(a) and individual retirement annuities described in section 408(B).Section 72(t)(2)(A) of the Code lists several types of distributions which are not subject to the section 72(t)(1) tax. Section 72(t)(2)(A)(ii) provides that distributions made to a beneficiary (or estate of the employee) on or after the death of the employee constitute one type of distribution on which the section 72(t)(1) tax will not be imposed.In this case, as noted above, Taxpayer B will receive a distribution from Plan X. Taxpayer B proposes to contribute said distribution to IRA Z as a rollover contribution, and then begin receiving distributions from said IRA. As noted with respect to your first ruling request, Taxpayer B's contributing the Plan X distribution to the IRA and her decision to continue to treat IRA Z as the IRA of Taxpayer A falls within the scope of section 402©(9). As a result of her actions, even after Taxpayer B accomplishes the rollover, she does not become the owner of the IRA but remains the beneficiary thereof for purposes of sections 402 and 72 of the Code.Thus, with respect to your third letter ruling request, we conclude:3. That distributions from IRA Z to Taxpayer B made prior to Taxpayer B's attaining age 59 1/2 will qualify for the section 72(t)(2)(A)(ii) of the Code exception to the 10 percent additional income tax imposed by section 72(t)(1) of the Code since they will be treated as having been made to a beneficiary as that term is defined in section 72(t)(2)(A)(ii) on or after the death of an employee.With respect to your fourth ruling request, section 401(a)(9)(A) of the Code provides, generally, that section 401(a) qualified plans must provide that the entire interest of each employee/plan participant will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).Section 401(a)(9)© of the Code defines "required beginning date" as April 1 of the year following the year in which the employee attains age 70 1/2.Section 408(a)(6) of the Code provides that under regulations promulgated by the Secretary rules similar to the rules of section 401(a)(9) shall apply to IRAs.Section 401(a)(9)(B) of the Code sets down the required distribution rules where the employee dies before his entire interest is distributed. Section 401(a)(9)(B)(i) of the Code provides that if the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), then the remaining portion of such interest will be distributed as least as rapidly as under the method of distribution being used as of the date of death.Section 401(a)(9)(B)(iii) of the Code, which sets down the operative rules in those cases where distribution of the employee's interest had not begun in accordance with subparagraph (A)(ii), provides generally that distributions to the designated beneficiary of such a deceased employee may be paid over the life or life expectancy of such a beneficiary and must begin no later than one year after the date of the employee's death or such later date as the Secretary may by regulations prescribe.Section 401(a)(9)(B)(iv) of the Code provides an exception to the general rule in (iii) above applicable to surviving spouses. If a surviving spouse is the designated beneficiary of a deceased employee, distributions to such a spouse need not begin until the date on which the employee would have attained age 70 1/2.As noted above, Taxpayer B's proposal to contribute her Plan X distribution into IRA Z will not be treated as an election on her part to treat the IRA as her IRA. Thus, she remains the beneficiary thereof for purposes of section 401(a)(9). As a result, distributions from said IRA to Taxpayer B will be subject to the rules of section 401(a)(9)(B) of the Code.Therefore, with respect to your fourth ruling request, we conclude:4. That since IRA Z will be treated as Taxpayer A's IRA it will be subject to the distribution rules of sections 401(a)(9)(B)(iii) and (iv) of the Code.These letter rulings are based on the assumption that Plan X is qualified under section 401(a) of the Code and its trust tax-exempt under section 501(a) at the time distributions from it are made to Taxpayer B. Furthermore, the rulings are based on the assumption that IRAs Y and Z will meet the applicable requirements of section 408 at all times relevant thereto. Additionally, the letter rulings are based on the assumption that the direct rollover of amounts from Plan X to IRA Z meets all of the rules applicable to direct rollovers found in sections 402 and 401(a)(31) of the Code. Finally, although not required under section 401(a)(9)(B), the letter rulings assume that Taxpayer B will begin to receive distributions from IRA Z no later than December 31, 1994.Please note that, in accordance with the factual representations made herein, the letter rulings also assume that IRA Z will be maintained in Taxpayer A's name at the time Taxpayer B receives her initial distribution therefrom, and that her receipt of distributions from IRA Z will be as a beneficiary thereof.Please also note that Taxpayer B's receipt of her initial distribution from IRA Z on which she does not pay the 10 percent additional income tax imposed by section 72(t)(1) at a time when IRA Z is maintained in the name of Taxpayer A will constitute an irrevocable election on her part to not treat IRA Z as her own IRA as permitted under section 1.408-8 of the proposed regulations, Qs and As A-4 and A-6.

Pursuant to a power of attorney on file in this office, a copy of this ruling letter is being sent to your authorized representative.

Sincerely yours, John G. Riddle, Jr., Acting Chief, Employee Plans, Rulings Branch

--------------------------------------------------------------------------------

JEVD

Making the complex understandable.

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  • 5 months later...

Two issues:

1. I dont think the IRS will allow an IRA to be opened by the representative of the decedant. There is case law on this. The rulings only allow the spouse to transfer retirement funds of the decedent to an existing IRA established by the decedent before death.

2. I dont think the IRA custodian will allow a personal representive to open an IRA in the decedent's name or ss number. There may be other restrictions in the USA Patriot Act that would prevent this transfer.

mjb

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It's a little hard without specific information. How old is the spouse? What is the account balance of the deceased? How much money per year does the spouse need, and for how many years?

Depending upon the answers to the above, perhaps this is doable. Any distributions for the next 5 years should be exempt from the premature distribution penalty, as they are 'death distributions.' The balance can then be rolled over, and taken under the substantially equal periodic payment rule. At worst, this should narrow the gap considerably. If the gap is too large, she could always take more over the next 5 years, and put what she doesn't need currently into a separate account, to be used to supplement the payments that are insufficient under the substantially equal periodic payment routine. I'm not necessarily sure why an IRA in the name of the decedent is so important here? She likely can get what she needs, paying only ordinary income tax, and roll over any balance she doesn't need, with a little creative finagling of timing and amounts of distributions.

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The main concern was the 10% penalty because of the subsequent distributions from the surviving spouse's rollover IRA. The surviving spouse is 55. Plan balance is around 1 MIL. The decedent's interest must be distributed by the cal yr containing the 5th anniversary of death....which ends up being December 31, 2003. I guess surviving spouse could calculate what amounts she would need expenditure-wise, kids' schooling, etc.... over the next 4 1/2 yrs and gross it up for taxes and pull that out of the plan in cash and then roll the remaining balance over into an IRA.....??? Any thoughts? Thanks for all of the prior input.....

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Does this help?

Noel Ice's site http://www.trustsandestates.net/MRDRegs/MR...htm#_Toc9937165

1.401(a)(9)-1 RMD REGS Annotated by Noel ICE see (b) (2)

Will the plan allow this election?

1.2 Q-2. Which employee account balances and benefits held under qualified trusts and plans are subject to the distribution rules of section 401(a)(9), this section, and §§1.401(a)(9)-2 through 1.401(a)(9)-9?

A-2

(a) In general.

The distribution rules of section 401(a)(9) apply to all account balances and benefits in existence on or after January 1, 1985. This section and §§1.401(a)(9)-2 through 1.401(a)(9)-9 apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003.[56]

(b) Beneficiaries.

(1) The distribution rules of this section and §§1.401(a)(9)-2 through 1.401(a)(9)-9 apply to account balances and benefits held for the benefit of a beneficiary for calendar years beginning on or after January 1, 2003, even if the employee died prior to January 1, 2003.[57] Thus, in the case of an employee who died prior to January 1, 2003, the designated beneficiary must be redetermined in accordance with the provisions of §1.401(a)(9)-4 and the applicable distribution period (determined under §1.401(a)(9)-5 or 1.401(a)(9)-6T, whichever is applicable) must be reconstructed for purposes of determining the amount required to be distributed for calendar years beginning on or after January 1, 2003.[58]

(2) A designated beneficiary that is receiving payments under the 5-year rule of section 401(a)(9)(B)(ii), either by affirmative election or default provisions, may, if the plan so provides, switch to using the life expectancy rule of section 401(a)(9)(B)(iii) provided any amounts that would have been required to be distributed under the life expectancy rule of section 401(a)(9)(B)(iii)[59] for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5-year period determined under A-2 of §1.401(a)(9)-3.[60]

JEVD

Making the complex understandable.

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