Non-spousal rollover fact pattern

[billfgrady]

Mom dies in 2005 as the owner of a Qualified Plan. Adult daughter is designated beneficiary of the QP. No RMD has been made to Daughter for 2006 yet. QP Admin. is telling Daughter she must take a lump sum distribution or take distributions over 5 years. What are people doing to get the most benefit out of the new non-spousal rollover provisions in cases like these? After all, the new rules aren't effective for distributions made until after December 31, 2006.

[Bird]

First thing I would do is make sure the statement that only lump sums are permitted is accurate. The plan might say that but there might be an RMD amendment that says distributions using life expectancy are permitted.

I'm not sure about your description of the mom as "owner" of a qualified plan. If she was just a participant, then skip this next comment, but if she was the owner of the business, then someone, perhaps the daughter, should have the power to change the plan to permit distributions over life expectancy if it's determined that the plan really doesn't permit them.

All that being said, if you are stuck with the lump sum, we don't know if the daughter could defer payment of a lump sum to 2007, and then do the rollover to an inherited IRA and take lifetime distributions from it. I have to think not, because that is effectively changing from the 5 year rule to a longer payout (although something tells me you can do that under present law, with an IRA, if you take out an extra amount for the first year that was skipped).

The bottom line is that we're awaiting guidance and don't know when it's forthcoming. But in your case, if you can't do a minimum distribution using the life expectancy method in 2006, then I'd certainly defer the lump sum to 2007 or later and hope to figure out some way to do an IRA rollover with systematic payouts coming from the IRA. I don't think there are any advantages to taking a lump sum in 2006.

[billfgrady]

Thanks for the response. You are correct: Mom is a participant in the QP, not the owner of the business.

I think we do know that Daughter CANNOT take a lump sum distribution and roll it over to an IRA in 2007. My understanding of the rule is that the money must be transferred via trustee-to-trustee transfer. The 60-day rollover option as we know it doesn't exist under this rule. Once distributed, it's taxable.

So, as I see it, Daughter can argue for an RMD based on the lifetime expectancy method in 2006 and then transfer the remainder of the QP assets to the IRA in 2007. If she can't get such an RMD, I guess the answer is to try and postpone any distributions (or at least minimize them) until 2007.

[txdd]

If the daughter can't get any relief from plan rules, it might still make sense to forego the 2006 RMD, pay the 50% penalty, and rollover to IRA in 2007. The future tax savings might more than make up for the penalty. It depends on the daughter's age and assumptions about future income and tax rates. Worth considering.

[Bird]

biffgrady:

I think you're on the right track. I do think that if the plan really does permit systematic distributions, and one is taken in 2006, another would have to be taken in 2007 before the rollover, and then the first systematic distribution from the IRA would occur in 2008.

txdd:

If the plan rules prohibit systematic distributions, i.e. forcing a lump sum within 5 years, then there really isn't a 2006 RMD to forego, is there?

[Guest mjb]

TXdd- I dont understand how the 50% penalty would be imposed in 2006 since under 401(a)(9)(B) the non spouse has 5 yrs after death to receive the lump sum. MRD reg (a)(9)-3, A-2. The excise tax cannot be imposed if distribution is taken by 12/31/10. The plan could kick out the benefits in a lump sum before 2010 if the plan so provides but most plans allow a delay of a distribution to an non spouse until the end of the fifth year after death.

[Guest allancoleman]

For whatever it's worth to this discussion , I just received a personal email message from my former employer retiree organization that my former employer was going to change their 401(k) beneficiary rules to create " The ability of non - spousal beneficiaries to roll - over qualifed plan monies directly to an IRA " . Email said additional information would be coming out in 2007 .

[billfgrady]

Why wasn't this effective as of August 17, 2006 (effective date of PPA) as opposed to January 1, 2007? Wouldn't that have prevented all of these transitional issues?

[Guest allancoleman]

Good question , bill . But , if I've been following the excellent advice of the posters here much more knowledgeable about the law than I , I would certainly would start a written , email , and verbal dialog with your qualified plan administrator and appeal to their better logic because it looks like the law is going to shortly allow you to roll those monies in a IRA anyway .

And if it were me in your shoes , I'd delay doing anything other than to document your attempts to satisify the intent of the regulations until you get to do what you want next year anyway . In my past arguements with the IRS many , many years ago about our old IRA rules , after wriing letters to my local IRS office , regional IRS office , and national IRS office in Washington , D.C. to provide myself with documentation after NOT getting a clear answer on any level as to my questions of what I could or couldn't do with several of my IRAs at that time , I just went ahead and did what I wanted to anyway and since then the current IRA rules have made all those past arguements pretty much history .

But that's easy for me to say and do because I'm not have a qualified tax person and I've always done my own taxes all these years and am prepared to face an audit at any time ...... with my checkbook in hand to pay a penality if necessary . . I've found if you keep excellent records and don't ever ignore the IRS , they are very reasonable to deal with on most all issues . Most of the IRS personal don't fully understand the issues either although very occassionally you'll run across an IRS agent who is really good and can explain the regulations to you in plain english . Good luck being caught between IRS regulation deadlines .