Open IRA in name of Decedent...

[chris]

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? If so, anyone know of financial institutions which will allow for the opening of an IRA in the name of the decedent? I remember PLR's allowing for a rollover of a decedent's IRA to a new decedent's IRA, but I don't recall anything addressing the ability to open a decedent's IRA... Also, I guess the plan document may constrain the ability to do this as well..

[jaemmons]

The surviving spouse is eligible to rollover the decedent's PS account balance to their own IRA. (Treas Regulation 1.402©-2, Q&A 12) A decedent IRA is unnecessary and I don't think can be done anyway.

[chris]

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 when no prior IRA existed. 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.

The problem is the 72t penalty b/c the decedent's acct. balance is due to be distributed from the PSP soon and the spouse will need access to those funds.

[jaemmons]

The 10% early distribution excise tax is not applicable to a death benefit distribution. (IRC 72(t)(2)(A)(ii)). Pardon my ignorance, but I don't see why the surviving spouse doesn't roll the money over to an IRA in her name. A surviving spouse is eligible to do this. Subsequent distributions from the IRA would be taxable to the surviving spouse, but would be exempt from excise taxes under 72(t) if any of the exemptions listed thereunder apply.

[chris]

Assuming the surviving spouse rolled it over to an IRA in her name, subsequent distributions from the IRA would be subject to the 10% penalty tax unless there were an exception. The "on account of death of the participant" exception would no longer apply. Thus, to the extent that the surviving spouse is younger than 59 1/2, the 10% penalty tax would apply. If the monies could stay in the plan that would be best b/c the 72 t penalty tax would be avoided. But they cannot, thus the alternative of an IRA in the name of the decedent...

[jaemmons]

chris,

What are the distribution options available for death benefits under the PSP? The surviving spouse may be able to elect annuity payments over his/her life expectancy, which in turn would be exempt from the 72(t) excise tax. In addition, unless there are plan provisions to the contrary, a spousal beneficiary cannot be forced to withdrawal a death benefit from a plan, regardless of the amount. Required distributions would not need to commence until the deceased participant would have attained age 70.5. Of course either option must be elected by September 30th following the calendar year of the deceased participant's death, according to the final 401(a)(9) regulations.