Spousal rollover from QP to inherited IRA

[card]

Notice 2007-7 provided detailed and controversial rules governing the ability of a nonspouse beneficiary to roll over benefits from an employer plan to an inherited IRA, where the 5 year RMD rule applies to the employer plan distributions.

While the Notice applies specifically to nonspouse beneficiaries, why wouldn't the IRS apply the same logic to a spouse beneficiary in the same situation?

For example, a spouse beneficiary might want to roll over 401(k) funds to an inherited IRA in order to get distributions free from the 10% early distribution tax. If the 401(k) plan requires use of the 5 year rule, what rule applies to the spouse beneficiary? why wouldn't he or she also be subject to the same rules the IRS sets out in Notice 2007-7? Ie, would the spouse beneficiary be required to complete the rollover by the end of the year following death in order to be able to take RMDs using the life expectancy method?

[Bird]

IRS Letter Ruling 200450057 allowed a widow to roll over her husband's PS plan proceeds into an IRA in his name with herself as the bene; the primary purpose was to allow her to avoid the 10% penalty on premature distributions that would have applied had she rolled into her own IRA (I thought there was a reg on this but can't do better than the PLR for now).

WRT your last question, a spouse doesn't have to choose the 5 year or life expectancy method if the participant dies before the RBD; they simply must take RMDs by te later of the year following the participant's death, or the year the participant would have turned 70 1/2. If death occurs after the RBD, the spouse can roll over or take annual RMDs.

[card]

"WRT your last question, a spouse doesn't have to choose the 5 year or life expectancy method if the participant dies before the RBD; they simply must take RMDs by te later of the year following the participant's death, or the year the participant would have turned 70 1/2. If death occurs after the RBD, the spouse can roll over or take annual RMDs."

Don't think you're correct. The plan can require use of the 5 year rule where the participant dies before starting RMDs. And if it does, I see no reason why a spouse would be treated differently from a nonspouse if he or she wishes to transfer the assets to an inherited IRA.

[masteff]

Card, I'm at a lose for why you're looking in 2007-7 for this for the spouse because the spouse had this already, unless there's some special nuiance to your scenario that I'm missing.

I think that what you're looking for already existed. The final regs for IRS Sec 401(a)(9) are available at http://www.irs.gov/pub/irs-irbs/irb02-19.pdf, beginning at page 8.

The purposes of the 2007-7 wasn't to give the non-spouse something the spouse doesn't have, but rather to make the non-spouse more like the spouse already was under existing laws and regs.

EDIT: the reg for the spousal rollover is 402©(9). you'll note in 2007-7 that the PPA created a new section 402©(11) for non-spousal rollovers.

[Guest mjb]

card: surviving spouse who rollovers a Q plan distribution from a deceased spouse to an inherited IRA where spouse is the beneficiary is not subject to 5 yr rule.

[card]

To Masteff: I'm not looking to 2007-7 for the spouse's RIGHT to rollover to an inherited IRA. I'm looking to 2007-7 by analogy to determine what rules apply if the spouse chooses to exercise that right. (btw, I know of some companies who take the position that, despite the PLRs, it's not clear that a spouse can rollover from a qualified plan to an inherited IRA. I think that's incorrect, and would lead to the anomaly of a nonspouse beneficiary now being able to do so while a spouse can not. Nat Choate thinks a rollover to an inherited IRA is possible and I think her logic is, as usual, reliable. section 3.2.07, 6th edition.)

To MJB: your statement is basically the question. if the spouse was subject to the 5 year rule in the qualified plan, then why shouldn't the same rule expressed in 2007-7 (ie, if the 5 year rule in the applies in the qualified plan, it also applies in the IRA unless the rollover is made within a year after the year of death) also apply to a spouse? If the spouse chooses to be treated the same as any other beneficiary by rolling over into an inherited IRA, rather than her own, then what is the legal basis for treating the spouse differently in this situation? Do you have a legal basis for your statement?

I think if you research this, you'll find little on point.

thanks.

card

[Guest mjb]

Card: The reason the surviving spouse is not subject to the 5 yr distribution requirement in RR 2007-07 is that unlike other beneficaries, under IRC 409(a)(9)(B)(iv)(I) a spouse beneficiary can defer payment until the date the employee would have attained age 70 1/2. Therefore there can be no application of the 5 yr rule to a surviving spouse beneficiary under IRC 401(a)(9) even if the plan has a requirement that the SS must receive the payments w/in 5 yrs. Once the funds are transferred from the plan to an inherited IRA they become subject to the inherited IRA rules of (B)(iv)(I) which allow deferral until the date the owner would have attained age 70 1/2. This provision is required in every IRA. IRAs do not contain language requiring distribution within 5 years by a surviving spouse who is the beneficiary of an inherited IRA b/c surviving spouses are exempt from the requirement of a distribution w/in 5 yrs of death under (B)(iv)(I).

[Appleby]

Card: The reason the surviving spouse is not subject to the 5 yr distribution requirement in RR 2007-07 is that unlike other beneficaries, under IRC 409(a)(9)(B)(iv)(I) a spouse beneficiary can defer payment until the date the employee would have attained age 70 1/2. Therefore there can be no application of the 5 yr rule to a surviving spouse beneficiary under IRC 401(a)(9) even if the plan has a requirement that the SS must receive the payments w/in 5 yrs. Once the funds are transferred from the plan to an inherited IRA they become subject to the inherited IRA rules of (B)(iv)(I) which allow deferral until the date the owner would have attained age 70 1/2. This provision is required in every IRA. IRAs do not contain language requiring distribution within 5 years by a surviving spouse who is the beneficiary of an inherited IRA b/c surviving spouses are exempt from the requirement of a distribution w/in 5 yrs of death under (B)(iv)(I).

mjb, Are you saying that the spouse beneficiary who chooses not to treat the IRA as his/her ‘own’ is never subject to the 5-year rule?

From what I understand, the spouse beneficiary, who chooses the beneficiary IRA option , has two options:

1. The five year option or
   
2. The life expectancy option.( this being the default, unless the document says otherwise)
   

Where the life expectancy option applies, (B)(iv)(I) kicks in for the spouse

[Guest mjb]

Correct me but I thought that under (B)(iv)(I) the spouse bene is never subject to the 5 yr requirement that applies to non spouse beneficary if the life expectancy option under (B)(iii)(I) is not elected because the earliest date for distribution under (B)(iv)(I) is the date the owner would have attained age 70 1/2. Therefore the 5 yr requirement never applies to a spouse bene who does not elect the life expectancy option by the end of the yr following the death of the IRA owner and the spouse bene can defer commencement of benefits until the yr the owner would have attained 70 1/2.

[masteff]

Correct me but I thought that under (B)(iv)(I) the spouse bene is never subject to the 5 yr requirement that applies to non spouse beneficary if the life expectancy option under (B)(iii)(I) is not elected because the earliest date for distribution under (B)(iv)(I) is the date the owner would have attained age 70 1/2. Therefore the 5 yr requirement never applies to a spouse bene who does not elect the life expectancy option by the end of the yr following the death of the IRA owner and the spouse bene can defer commencement of benefits until the yr the owner would have attained 70 1/2.

You are essentially correct. I'd just change a nuiance. The spouse does elect the life expectancy option but (B)(vi)(I) says it doesn't have to begin until participant would have been 70.5. And since laws and regs in the last 5 or so years have made life expectancy the default option, then surviving spouse will default to life expectancy method beginning when participant would have been 70.5. End result is the same, 5-yr method is bypassed for surviving spouse.

I suppose the more important thing being... the spouse is never forced into the 5-yr method.