Nonspouse Beneficiary Direct Rollover

[DTH]

If a nonspouse designated beneficiary elects to directly rollover to an Inherited IRA in the 2nd - 4th year after death, does the plan need to distribute the MRD first?

Example: Participant dies in 2007. The plan only permits the 5-Year Rule.

Year of Death (2007) - Nonspouse can directly rollover entire account to the inherited IRA. The nonspouse can elect the 5-Year Rule or Life Expectancy Rule under the IRA.

Year After Death (2008) - Nonspouse can directly rollover the account to the inherited IRA but only after the MRD is paid first. The plan assumes that the nonspouse is rolling over to the inherited IRA to elect the Life Expectancy Rule. The nonspouse can still elect the 5-Year Rule or Life Expectancy Rule under the IRA.

2nd - 4th Year After Death (2009 - 2011) - Nonspouse still can directly rollover to the inherited IRA, but to the extent only the 5-Year Rule applies under the IRA, does the plan need to pay the MRDs due first?

5th Year of Death (2012) - Direct rollover not permitted since this is the 5th year after death and the entire account balance is the MRD.

Would there be any difference in the scenario above if the plan allows the nonspouse designated beneficiary to elect either the 5-Year Rule of Life Expectancy Rule.

Thanks!

[J Simmons]

If a nonspouse designated beneficiary elects to directly rollover to an Inherited IRA in the 2nd - 4th year after death, does the plan need to distribute the MRD first?

Example: Participant dies in 2007. The plan only permits the 5-Year Rule.

Year of Death (2007) - Nonspouse can directly rollover entire account to the inherited IRA. The nonspouse can elect the 5-Year Rule or Life Expectancy Rule under the IRA.

Year After Death (2008) - Nonspouse can directly rollover the account to the inherited IRA but only after the MRD is paid first. The plan assumes that the nonspouse is rolling over to the inherited IRA to elect the Life Expectancy Rule. The nonspouse can still elect the 5-Year Rule or Life Expectancy Rule under the IRA.

2nd - 4th Year After Death (2009 - 2011) - Nonspouse still can directly rollover to the inherited IRA, but to the extent only the 5-Year Rule applies under the IRA, does the plan need to pay the MRDs due first?

5th Year of Death (2012) - Direct rollover not permitted since this is the 5th year after death and the entire account balance is the MRD.

Would there be any difference in the scenario above if the plan allows the nonspouse designated beneficiary to elect either the 5-Year Rule of Life Expectancy Rule.

Thanks!

Your are correct as to the rollover in 2007, the year of death.

As for 2008, I understand the logic but I'm not sure the IRS pronouncements would allow for the first LE RMD to come out of the IRA rather than the QRP. The reason is that if no LE RMD for 2008 comes out of the QRP, then it might be that the RMD is the 5 year one and you'd not have the option of LE RMDs out of the IRA. It shouldn't matter whether the RMD for a year comes out of the QRP or the rollover IRA, but that's how I read Notice 2007-7. What you could do, even if the QRP is not cooperative, is to determine the LE RMD for the year of rollover yourself, and then elect a rollover to the IRA of only the remainder and direct payment to the nonspouse beneficiary of the rest (i.e., of the amount to satisfy the LE RMD for that year).

As for 2nd - 4th Year After Death (2009 - 2011), Notice 2007-7 indicates that the LE RMD for the year of rollover needs to come from the QRP. See paragraph above.

As for 5th Year of Death (2012), you are correct that there can be no rollover--unless, of course, each of the LE RMDs for years 2008-2012 have been made from the QRP.

[gc@chimentowebb.com]

<<As for 2008, I understand the logic but I'm not sure the IRS pronouncements would allow for the first LE RMD to come out of the IRA rather than the QRP. The reason is that if no LE RMD for 2008 comes out of the QRP, then it might be that the RMD is the 5 year one and you'd not have the option of LE RMDs out of the IRA. It shouldn't matter whether the RMD for a year comes out of the QRP or the rollover IRA, but that's how I read Notice 2007-7. >>

John, that's how I read 2007-7 also. However, http://www.irs.gov/pub/irs-tege/se_021307.pdf is a 2/13/2007 "clarification" that allows participants in plans which only allow for the 5 year rule to elect the annual installment method for distributions from the IRA, provided the election is made no later than the year following death.

The Newsletter does not expressly say it, but I have to assume that the IRS means in that case (where the plan only provides for the 5 year rule) that the beneficiary's MRD for the year after death could be paid from the IRA. How else could a particpant in this circumstance make an election?

It's not a Plan qualification issue, because the plan is permitted to transfer a lump sum in the year following death. It really boils down to whether the beneficiary can elect the annual installment method and take the first withdrawal from the IRA, rather than hoping that the plan will change payment procedures to accomodate the beneficiary's tax planning. I think the IRS is agreeing to that (payment from the IRA).

It's good news for employers. It means they can stay with the 5 year rule, pay transfers in a lump sum, and beneficiaries of their deceased employees can still get favorable treament without the need for a special distribution in the year following death.

What do you think?

George Chimento

[gc@chimentowebb.com]

Last sentence should have read:

"It means they can stay with the 5 year rule, pay transfers in a lump sum, and beneficiaries of their deceased employees can still get favorable treament without the need for a special PLAN distribution in the year following death."

The distribution would simply come from the IRA no later than 12/31 of the year following death.

George