Non-spouse Beneficiary

[Guest jefe96]

With the advent of the new PPA rule that allows a non-spouse to rollover a death benefit the question arises can that non-spouse beneficiary take a partial lump sum distribution and then rollover the remaining proceeds to an inherited IRA? Or does it need to be all or nothing? Would this have to be spelled out in the document?

[J Simmons]

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.

Notice 2007-7, Q&A-15

The right that other distributees of eligible rollover distributions to have part of the benefits directly rolled over and part not, if the benefits payable exceed $500, is due to regulations under 401(a)(31). IRS Reg. §1.401(a)(31)-1, Q&A-9.

Thus, the plan if it allows direct rollovers to non-spouse beneficiaries may require it to be 'all or nothing'.

Does it need to be spelled out in the document one way or the other? I think it would only need to be mentioned if a split out (part to be rolled over and part not) is to be allowed. If the documents do not address the issue of whether the non-spouse beneficiary would have the split-out option, I would think if it would be 'all or nothing'.

[MoShawn]

Does this mean that a lump sum distribution to a non-spousal beneficiary is not subject to the mandatory 20% federal income tax withholding?

[masteff]

Does this mean that a lump sum distribution to a non-spousal beneficiary is not subject to the mandatory 20% federal income tax withholding?

... the distribution is not subject to ... the mandatory withholding requirements of §3405© ...

Correct, as 3405© is the section that provides the 20% mandatory withholding on rollovers.

[Guest mjb]

yes.

[Guest jefe96]

Does the rule that distribution must take place by December 31st of the year following the year of death still apply?

[J Simmons]

Yes, it does if you want to begin annual withdrawals over lifetime rather than have a complete distribution by the end of the 5th year following death.