Non-spouse rollover to IRA

[Guest pclinch]

Participant in a 401(k) plan died 4 years ago and his daughter has been receiving about $10,000 each year and her final payment (due to 5 year rule) of approximately $300,000 needs to be distributed in 2007. Can the daughter roll the remaining benefit to an IRA in 2007 and disburse each year $10,000 from the IRA? Would she be allowed to take only the minimum distribution based on her life expectancy from the IRA? The father died before his required beginning date. Thanks!

[Guest mjb]

IRS is expected to issues guidance on transfers of inherited IRAs and other PPA changes before year end. Stay tuned.

[Bird]

Participant in a 401(k) plan died 4 years ago and his daughter has been receiving about $10,000 each year and her final payment (due to 5 year rule) of approximately $300,000 needs to be distributed in 2007.

That statement appears to be inconsistent; if the $10,000 distributions were systematic based on her life expectancy then the 5 year year doesn't apply. If that's the scenario then I believe the intent of the new non-spousal rollover provisions is to allow her to roll out to an IRA and continue systematic distributions from it. As noted, we're awaiting regs for clarification on exactly what can be done and when.

[Appleby]

Participant in a 401(k) plan died 4 years ago and his daughter has been receiving about $10,000 each year and her final payment (due to 5 year rule) of approximately $300,000 needs to be distributed in 2007.

That statement appears to be inconsistent; if the $10,000 distributions were systematic based on her life expectancy then the 5 year year doesn't apply. If that's the scenario then I believe the intent of the new non-spousal rollover provisions is to allow her to roll out to an IRA and continue systematic distributions from it. As noted, we're awaiting regs for clarification on exactly what can be done and when.

Bird,

I’m not sure I understand why it is inconsistent. Under the five year rule, you can withdraw any amount- including zero dollars, providing the account is fully distributed by the end of the fifth year.

Maybe the plan only offered the five year option? Or maybe she elected the five year option?

[KJohnson]

If a non-spouse is eligible for distributions prior to '07 I can imagine four scenarios:

1) Any non-spouse who still has an account balance left in a plan as of '07 can make a rollover into an "inherited" IRA no matter whether you are dealing with a life expectancy or 5 year distribution pattern.

2) Only non-spouse of any participant who died in '06 and who did not take a distribution in '06 is eligible to rollover to an inherited IRA (since they would not have to make the "life expectancy" election until the end of '07.)

3) Both the non-spouse in situation 2 and any non-spouse who elected by the end of the calendar year following the year of the particpant's death to receive life expectancy distributions can make a rollover to an inherited IRA of any account balance left as of '07.

4) All non-spouses who were eligible for any distribution prior to '07 are barred from rolling over an account balance into an inherited IRA.

If I had to guess, it would seem that (3) would make the most sense since you are preserving the notion that if you are taking life expectancy distributions, those distributions have to begin by the end of the calendar year following the year of the participant's death and it doesn't matter whether these come from the Plan or the inherited IRA. But, we will have to wait and see.

[Bird]

Appleby-

I guess I was assuming the $10,000 distributions were RMDs based on life expectancy, but you're right, that's not necessarily so; they could be arbitrary amounts that the bene requested. I guess we won't know unless the original poster graces us with some feedback.

KJohnson-

I agree that your #3 is a likely result. Allowing #1 would be more generous than would have been allowed under old law (but it's possible because it's not such a huge gift) and I sure hope #4 isn't what we get...I've been setting the groundwork for several benes to get their ##%*&& money out of my plans in 2007!