10% penalty on IRA distributions

[kocak]

A spouse (<59 1/2) is the beneficiary of a death benefit from a qualified plan. My understanding is that spouse can (1) roll the proceeds into an IRA, or (2) receive a distribution from the plan.

In scenario (2) the distribution is taxable income to the spouse but the 10% penalty on early withdrawal (<59 1/2)is waived.

If the spouse elects (1) a rollover, then it must be to an IRA. They can not roll to a qualified plan.

My question: If the spouse elects rollover and then takes a distribution from the IRA are they subject to the 10% early withdrawal penalty or is the penalty waived because the IRA is proceeds from a death?

Any cites are welcome. Thank you.

mck

[BPickerCPA]

The spouse has TWO rollover options. One is to roll the plan proceeds into an IRA is HIS name, with survivor as beneficiary, the other is to roll it into HER own IRA.

If she rolls it into HER own IRA, then it's HER IRA, and she will be penalized if she takes money prior to 59½.

If the IRA is in decedent's name, and she takes a beneficiary distribution, no penalty.

This is not an all or nothing proposition. You can arrange part one way and part the other.

[kocak]

Thank you very much. That is exactly what I needed to know.

mck

[QDROphile]

Could you cite authority for the proposition that a spouse beneficiary can roll over from a qualified plan to the deceased participants's IRA?

[Guest Harry O]

See PLR 9418034.

I have to say I was a bit surprised when I first heard about this, too . . .

As indicated by BPicker, this is a nifty planning option for the spouse.

[Guest danmar]

You have to be careful about rolling to a bene IRA from a Qualified Plan.

First, many IRA custodians won't accept such a transfer or may require a letter of indemnification prior to establishing the benefial IRA account.

Second, the authority for this strategy is Private Letter Rulings, which carry no precedence. The IRS may view your case or your client's case differently than they viewed another case in a previous PLR.

Third, the IRS forces an all-or-nothing choice in this situation. If the spouse is under 59 1/2 and rolls to a bene IRA and takes distributions w/o the 10% peanlty, then she cannot later decide to roll that bene IRA into her own IRA and thus cannot name her own beneficiary on the account and may be subject to earlier RMDs based on when her husband would have turned 70 1/2. Check out the 11/9/98 issue of RIA's Pension & Benefits Week.

[Guest DLevin]

I was not aware that the IRS took an all or nothing position on this. I think they would like to, but there is no real authority. The authority that exists would seem to allow the spouse to take distributions prior to her age 59 1/2 and roll over the account after attaining that age. Assuming the decedent was not yet 70 1/2, the spouse treats the IRA as an inherited IRA if she takes a minimum required distribution from it. She is not required to begin taking this MRD until the decedent would have attained his required beginning date. Any distributions taken before then should not have an impact. Even more, there is no restriction in the Code or proposed regs to restrict the spouse's right to rollover at anytime. The discussions I have heard from the IRS indicate they are not pleased but probably cannot prevent this best of both worlds.