Inherited IRA

[Guest greybeard]

Participant age 63 died within past week or two, possibly 2006. Designated beneficiary is son age 34. With PPA son can have benefits transferred to Inherited IRA. When must distributions and at what duration must distributions be made. The son's broker has said that it must all be paid out in five(5) years. I somehow do not believe that the broker is correct.

Options available

Commence by 12/31/07 and be based on son's life expectancy (probably the single life table)

Commence by 12/31/07 and be paid out in five(5) years. Brokers suggestion.

Wait till son is 70 1/2 about 2043.

Wait till participant would have been 70 1/2 about 2013

Any other options suggested.

[Belgarath]

See Section V of IRS Notice 2007-7.

V. SECTION 829 OF PPA '06

Under § 402©(11) of the Code, which was added by § 829 of PPA '06, if a direct trustee-to-trustee transfer of any portion of a distribution from an eligible retirement plan is made to an individual retirement plan described in § 408(a) or (b) (an "IRA") that is established for the purpose of receiving the distribution on behalf of a designated beneficiary who is a nonspouse beneficiary, the transfer is treated as a direct rollover of an eligible rollover distribution for purposes of § 402©. The IRA of the nonspouse beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)©. Section 402©(11) applies to distributions made after December 31, 2006.

Q-11. Can a qualified plan described in § 401(a) offer a direct rollover of a distribution to a nonspouse beneficiary?

A-11. Yes. Under § 402©(11), a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), provided that the distributed amount satisfies all the requirements to be an eligible rollover distribution other than the requirement that the distribution be made to the participant or the participant's spouse. (See § 1.401(a)(9)-4 for rules regarding designated beneficiaries.) The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA pursuant to the provisions of § 402©(11). If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution. See § 1.401(a)(31)-1, Q&A-3 and-4, for procedures for making a direct rollover.

Q-12. Can other types of plans offer a direct rollover of a distribution to a nonspouse beneficiary?

A-12. Yes. Section 402©(11) also applies to annuity plans described in § 403(a) or (b) and to eligible governmental plans under § 457(b).

Q-13. How must the IRA be established and titled?

A-13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, "Tom Smith as beneficiary of John Smith."

Q-14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402©(11)?

A-14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary. If a plan does offer direct rollovers to nonspouse beneficiaries of some, but not all, participants, such rollovers must be offered on a nondiscriminatory basis because the opportunity to make a direct rollover is a benefit, right, or feature that is subject to § 401(a)(4). In the case of distributions from a terminated defined contribution plan pursuant to 29 C.F.R. § 2550.404a-3(d)(1)(ii), the plan will be considered to offer direct rollovers pursuant to § 402©(11) with respect to such distributions without regard to plan terms.

Q-15. For what purposes is the direct rollover of a distribution by a nonspouse beneficiary treated as a rollover of an eligible rollover distribution?

A-15. Section 402©(11) provides that a direct rollover of a distribution by a nonspouse beneficiary is a rollover of an eligible rollover distribution only for purposes of § 402©. Accordingly, the distribution is not subject to the direct rollover requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory withholding requirements of § 3405©. If an amount distributed from a plan is received by a nonspouse beneficiary, the distribution is not eligible for rollover.

Q-16. If the named beneficiary of a decedent is a trust, is a plan permitted to make a direct rollover to an IRA established with the trust as beneficiary?

A-16. Yes. A plan may make a direct rollover to an IRA on behalf of a trust where the trust is the named beneficiary of a decedent, provided the beneficiaries of the trust meet the requirements to be designated beneficiaries within the meaning of § 401(a)(9)(E). The IRA must be established in accordance with the rules in Q&A-13 of this notice, with the trust identified as the beneficiary. In such a case, the beneficiaries of the trust are treated as having been designated as beneficiaries of the decedent for purposes of determining the distribution period under § 401(a)(9), if the trust meets the requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.

Q-17. How is the required minimum distribution (an amount not eligible for rollover) determined with respect to a nonspouse beneficiary if the employee dies before his or her required beginning date within the meaning of § 401(a)(9)©?

A-17. (a) General rule. If the employee dies before his or her required beginning date, the required minimum distributions for purposes of determining the amount eligible for rollover with respect to a nonspouse beneficiary are determined under either the 5- year rule described in § 401(a)(9)(B)(ii) or the life expectancy rule described in § 401(a)(9)(B)(iii). See Q&A-4 of § 1.401(a)(9)-3 to determine which rule applies to a particular designated beneficiary. Under either rule, no amount is a required minimum distribution for the year in which the employee dies. The rule in Q&A-7(b) of § 1.402©-2 (relating to distributions before an employee has attained age 70 1/2) does not apply to nonspouse beneficiaries.

(b) Five-year rule. Under the 5-year rule described in § 401(a)(9)(B)(ii), no amount is required to be distributed until the fifth calendar year following the year of the employee's death. In that year, the entire amount to which the beneficiary is entitled under the plan must be distributed. Thus, if the 5-year rule applies with respect to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), for the first 4 years after the year the employee dies, no amount payable to the beneficiary is ineligible for direct rollover as a required minimum distribution. Accordingly, the beneficiary is permitted to directly roll over the beneficiary's entire benefit until the end of the fourth year (but, as described in Q&A-19 of this notice, the 5-year rule must also apply to the IRA to which the rollover contribution is made). On or after January 1 of the fifth year following the year in which the employee died, no amount payable to the beneficiary is eligible for rollover.

© Life expectancy rule. (1) General rule. If the life expectancy rule described in § 401(a)(9)(B)(iii) applies, in the year following the year of death and each subsequent year, there is a required minimum distribution. See Q&A-5©(1) of § 1.401(a)(9)-5 to determine the applicable distribution period for the nonspouse beneficiary. The amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year (even if the excise tax under § 4974 has been paid with respect to the failure in the prior years). See the last sentence of § 1.402©-2, Q&A- 7(a).

(2) Special rule. If, under paragraph (b) or © of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary.

Q-18. How is the required minimum distribution with respect to a nonspouse beneficiary determined if the employee dies on or after his or her required beginning date?

A-18. If an employee dies on or after his or her required beginning date, within the meaning of § 401(a)(9)©, for the year of the employee's death, the required minimum distribution not eligible for rollover is the same as the amount that would have applied if the employee were still alive and elected the direct rollover. For the year after the year of the employee's death and subsequent years, see Q&A-5 of § 1.401(a)(9)-5 to determine the applicable distribution period to use in calculating the required minimum distribution. As in the case of death before the employee's required beginning date, the amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year, including years before the employee's death.

Q-19. After a direct rollover by a nonspouse designated beneficiary, how is the required minimum distribution determined with respect to the IRA to which the rollover contribution is made?

A-19. Under § 402©(11), an IRA established to receive a direct rollover on behalf of a nonspouse designated beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)©. The required minimum distribution requirements set forth in § 401(a)(9)(B) and the regulations thereunder apply to the inherited IRA. The rules for determining the required minimum distributions under the plan with respect to the nonspouse beneficiary also apply under the IRA. Thus, if the employee dies before his or her required beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan making the direct rollover, the 5-year rule applies for purposes of determining required minimum distributions under the IRA. If the life expectancy rule applied to the nonspouse designated beneficiary under the plan, the required minimum distribution under the IRA must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred. Similarly, if the employee dies on or after his or her required beginning date, the required minimum distribution under the IRA for any year after the year of death must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred.

[Guest jackstpaul]

You're kidding??

Son, beneficiary of father's 401(k); died Nov 2006. ~= $70,000. Need to choose disbursement option by Feb. 15 or they cut a check for all of it.

I want to roll the $ into an inherited IRA I've set up with Schwab. The 401(k) Company is 3M (administered by Hewitt, I believe). Obvious reasons to roll into Inherited IRA for no taxes due and ability to take withdrawals from the IRA without penalty moving forward.

I called the plan today to settle the issues about timing and titling of the check to be made, and they told me they can't title the check that way and do not make rollovers into non-spousal beneficiaries' inherited IRAs. Can do it according to new law, but just will not do via internal policy.

I'm going crazy. The tax implications for me are immense, obviously. I have 3 siblings, 2 of whom want to roll to an inherited IRA.

Is it really true that 3M can just refuse to roll into an inherited IRA for me despite the new law? Why in the world would the IRS make that optional for the Company plan?

It seems to me from my own reading and elsewhere--and from Schwab--that the central issue for the Plan, Schwab, and me to get the money moved is the way the check is titled and that it goes to Schwab and that I can't cash it myself or I break the chain of the rollover and lose the non-tax status.

If that's correct, then what difference does it make to 3M? It seems that the only way they are affected is that they need to title the check slightly different than otherwise. Is that true?

If so, do they even need to know that the money is going to an inherited IRA? Can't they just title the check properly--as I request in the language I submit--for it to go to my Inherited IRA without ever getting information from anyone that the $ goes to the inherited IRA? They seem to have a standard way to title checks if they're going to a fin. institution that's different from the way I need.

I don't see any operational difference for 3M at all. No extra expense, regulatory requirements, or financial exposure.

This seems crazy that 3M can just decide what my tax implications will be--that I have to pay taxes.

I have about a month. I plan on talking to a tax attorney--have not yet--to make sure I get accurate information and advice. If it's true that 3M can prevent me from the roll into the inherited IRA, I want to try and influence them, intimidate them, or sue them into doing the roll. It seemss very strange that they pull the the strings. I'm on SSDI and live on $14,000 a year and have minimal assets--not home. The tax payments will be deadly to me if I have to pay the $10-15,000 in taxes. Along with my siblings the $ lost to taxes could be as high as $60,000.

With the new law, it seems difficult to get information that I can trust as being accurate. Every time I've called 3M about how to handle my 401(k) and processing, etc. they seem to have no idea what they're talking about. The newness of the law is a barrier to getting good info.

I am desperately in need of advice--I will be talking to a tax attorney, but I want to learn what I can asap.

Thanks.

Email if you wish jackstpaul@yahoo.com to help or reply here.

See Section V of IRS Notice 2007-7.

V. SECTION 829 OF PPA '06

Under § 402©(11) of the Code, which was added by § 829 of PPA '06, if a direct trustee-to-trustee transfer of any portion of a distribution from an eligible retirement plan is made to an individual retirement plan

[Bird]

From above:

Q-14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402©(11)?

A-14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary.

Why a plan would not do this is beyond me but it's not required.

But the first thing I would do is challenge the (what appears to be arbitrary) Feb 15 deadline. The regs require that systematic RMDs start by Dec 31 of the year following the year of death, or total distribution within 5 years. The plan can set its own rules within these parameters but I seriously doubt that the plan requires the money to be paid out by 2/15/07 for a death occuring in Nov 2006.

Buy yourself some time and they might change their mind about allowing the inherited IRA rollover. Heck, the notice just came out a couple of days ago so it's hard to imagine that the plan administrator has made a final decision on this issue.

[Guest jackstpaul]

See Section V of IRS Notice 2007-7.

V. SECTION 829 OF PPA '06

Under § 402©(11) of the Code, which was added by § 829 of PPA '06, if a direct trustee-to-trustee transfer of any portion of a distribution from an eligible retirement plan is made to an individual retirement plan described in § 408(a) or (b) (an "IRA") that is established for the purpose of receiving the distribution on behalf of a designated beneficiary who is a nonspouse beneficiary, the transfer is treated as a direct rollover of an eligible rollover distribution for purposes of § 402©. The IRA of the nonspouse beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)©. Section 402©(11) applies to distributions made after December 31, 2006.

Q-11. Can a qualified plan described in § 401(a) offer a direct rollover of a distribution to a nonspouse beneficiary?

A-11. Yes. Under § 402©(11), a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), provided that the distributed amount satisfies all the requirements to be an eligible rollover distribution other than the requirement that the distribution be made to the participant or the participant's spouse. (See § 1.401(a)(9)-4 for rules regarding designated beneficiaries.) The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA pursuant to the provisions of § 402©(11). If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution. See § 1.401(a)(31)-1, Q&A-3 and-4, for procedures for making a direct rollover.

Q-12. Can other types of plans offer a direct rollover of a distribution to a nonspouse beneficiary?

A-12. Yes. Section 402©(11) also applies to annuity plans described in § 403(a) or (b) and to eligible governmental plans under § 457(b).

Q-13. How must the IRA be established and titled?

A-13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, "Tom Smith as beneficiary of John Smith."

Q-14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402©(11)?

A-14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary. If a plan does offer direct rollovers to nonspouse beneficiaries of some, but not all, participants, such rollovers must be offered on a nondiscriminatory basis because the opportunity to make a direct rollover is a benefit, right, or feature that is subject to § 401(a)(4). In the case of distributions from a terminated defined contribution plan pursuant to 29 C.F.R. § 2550.404a-3(d)(1)(ii), the plan will be considered to offer direct rollovers pursuant to § 402©(11) with respect to such distributions without regard to plan terms.

Q-15. For what purposes is the direct rollover of a distribution by a nonspouse beneficiary treated as a rollover of an eligible rollover distribution?

A-15. Section 402©(11) provides that a direct rollover of a distribution by a nonspouse beneficiary is a rollover of an eligible rollover distribution only for purposes of § 402©. Accordingly, the distribution is not subject to the direct rollover requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory withholding requirements of § 3405©. If an amount distributed from a plan is received by a nonspouse beneficiary, the distribution is not eligible for rollover.

Q-16. If the named beneficiary of a decedent is a trust, is a plan permitted to make a direct rollover to an IRA established with the trust as beneficiary?

A-16. Yes. A plan may make a direct rollover to an IRA on behalf of a trust where the trust is the named beneficiary of a decedent, provided the beneficiaries of the trust meet the requirements to be designated beneficiaries within the meaning of § 401(a)(9)(E). The IRA must be established in accordance with the rules in Q&A-13 of this notice, with the trust identified as the beneficiary. In such a case, the beneficiaries of the trust are treated as having been designated as beneficiaries of the decedent for purposes of determining the distribution period under § 401(a)(9), if the trust meets the requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.

Q-17. How is the required minimum distribution (an amount not eligible for rollover) determined with respect to a nonspouse beneficiary if the employee dies before his or her required beginning date within the meaning of § 401(a)(9)©?

A-17. (a) General rule. If the employee dies before his or her required beginning date, the required minimum distributions for purposes of determining the amount eligible for rollover with respect to a nonspouse beneficiary are determined under either the 5- year rule described in § 401(a)(9)(B)(ii) or the life expectancy rule described in § 401(a)(9)(B)(iii). See Q&A-4 of § 1.401(a)(9)-3 to determine which rule applies to a particular designated beneficiary. Under either rule, no amount is a required minimum distribution for the year in which the employee dies. The rule in Q&A-7(b) of § 1.402©-2 (relating to distributions before an employee has attained age 70 1/2) does not apply to nonspouse beneficiaries.

(b) Five-year rule. Under the 5-year rule described in § 401(a)(9)(B)(ii), no amount is required to be distributed until the fifth calendar year following the year of the employee's death. In that year, the entire amount to which the beneficiary is entitled under the plan must be distributed. Thus, if the 5-year rule applies with respect to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), for the first 4 years after the year the employee dies, no amount payable to the beneficiary is ineligible for direct rollover as a required minimum distribution. Accordingly, the beneficiary is permitted to directly roll over the beneficiary's entire benefit until the end of the fourth year (but, as described in Q&A-19 of this notice, the 5-year rule must also apply to the IRA to which the rollover contribution is made). On or after January 1 of the fifth year following the year in which the employee died, no amount payable to the beneficiary is eligible for rollover.

© Life expectancy rule. (1) General rule. If the life expectancy rule described in § 401(a)(9)(B)(iii) applies, in the year following the year of death and each subsequent year, there is a required minimum distribution. See Q&A-5©(1) of § 1.401(a)(9)-5 to determine the applicable distribution period for the nonspouse beneficiary. The amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year (even if the excise tax under § 4974 has been paid with respect to the failure in the prior years). See the last sentence of § 1.402©-2, Q&A- 7(a).

(2) Special rule. If, under paragraph (b) or © of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary.

Q-18. How is the required minimum distribution with respect to a nonspouse beneficiary determined if the employee dies on or after his or her required beginning date?

A-18. If an employee dies on or after his or her required beginning date, within the meaning of § 401(a)(9)©, for the year of the employee's death, the required minimum distribution not eligible for rollover is the same as the amount that would have applied if the employee were still alive and elected the direct rollover. For the year after the year of the employee's death and subsequent years, see Q&A-5 of § 1.401(a)(9)-5 to determine the applicable distribution period to use in calculating the required minimum distribution. As in the case of death before the employee's required beginning date, the amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year, including years before the employee's death.

Q-19. After a direct rollover by a nonspouse designated beneficiary, how is the required minimum distribution determined with respect to the IRA to which the rollover contribution is made?

A-19. Under § 402©(11), an IRA established to receive a direct rollover on behalf of a nonspouse designated beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)©. The required minimum distribution requirements set forth in § 401(a)(9)(B) and the regulations thereunder apply to the inherited IRA. The rules for determining the required minimum distributions under the plan with respect to the nonspouse beneficiary also apply under the IRA. Thus, if the employee dies before his or her required beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan making the direct rollover, the 5-year rule applies for purposes of determining required minimum distributions under the IRA. If the life expectancy rule applied to the nonspouse designated beneficiary under the plan, the required minimum distribution under the IRA must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred. Similarly, if the employee dies on or after his or her required beginning date, the required minimum distribution under the IRA for any year after the year of death must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred.

[Guest jackstpaul]

Thanks Bird. Your advice has gived me some clarity.

Couple of tax lawyers won't touch it since it's unknown territory and don't want to be at risk financially. Huh? Isn't this what they do?

As far as I've been told by plan their policy is they won't do it. I'm worried that they don't know what they're talking about, given the newness. How do I make sure I'm getting solid policy information from them; find who can speak authoritatively? I've spoke to a specialist in the plan with distribution issues--not merely a customer service rep, but who knows?

2nd: The plan hasn't issued any written policy, or posted it to their website. Isn't there some sort of requirement for plans to tell participants about policy changes, new issues?

3. Yes, they require a distribution arrangement to be made by 90 days after, choosing either a lump-sum or installment plan.

My new thinking is to get an EB lawyer/expert to help understand 401(k) plan requirements rather than tax laws, and to draft a letter to be sent to the Plan inquiring about the policy and asking about changing/creating one and if they'll let me do the rollover. My thinking is, as you pointed out, that maybe they don't really have a policy yet, and that an inquiry will prompt them to adopt a policy sooner rather than later. Better to come from a lawyer than me, I figure.

I can't believe the IRS made this optional and that by (bad) luck of the draw I'm stuck in a plan that will cost me $15-20k in taxes + lost investment returns.

From above:

Q-14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402©(11)?

A-14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary.

Why a plan would not do this is beyond me but it's not required.

But the first thing I would do is challenge the (what appears to be arbitrary) Feb 15 deadline. The regs require that systematic RMDs start by Dec 31 of the year following the year of death, or total distribution within 5 years. The plan can set its own rules within these parameters but I seriously doubt that the plan requires the money to be paid out by 2/15/07 for a death occuring in Nov 2006.

Buy yourself some time and they might change their mind about allowing the inherited IRA rollover. Heck, the notice just came out a couple of days ago so it's hard to imagine that the plan administrator has made a final decision on this issue.

[Bird]

My experience is not with big plans such as this one, but I am still skeptical about that 90 day deadline. I'd ask for a copy of the Summary Plan Description, and then if necessary you can ask for a copy of the plan itself. And I still doubt that they have made a policy decison to permit or not permit direct transfers to inherited IRAs, given that the IRS guidance is only a few days old. Up until this year, they were not permitted to transfer money to an IRA for a non-spouse beneficiary under any circumstance, so it's not surprising that in Jan 2007 they're (still) saying it can't be done.

(More on the 90 day thing - prior to 2007, a plan had 90 days to complete a distribution after giving a "Special Tax Notice." As of 2007, the 90 days is now 180. I've seen this misinterpreted that the plan has to "do something" within 90/180 days, but it really means that if the distribution isn't completed within that time frame, another notice simply has to be given before the distribution is completed. A plan may have its own "cashout" rules but I still think it unlikely that a death distribution must commence within 90 days of death. It's not hard to imagine that the plan wouldn't even know about the death of a retired participant for more than 90 days.)