Death, Rollover and RMD

[SMB]

Husband (Fred) and wife (Wilma) are co-owners of a business and both are covered by the company's DC Plan.

Both Fred and Wilma had a "required beginning date" of 04/01/07 for purposes of commencing their required minimum distributions from the Plan.

Fred died in 2006, prior to his required beginning date. Wilma received her 2006 required minimum distribution based on her 12/31/05 Plan balance.

In 2007, Wilma (as Fred's surviving spouse and beneficiary) rolled over Fred's Plan balance to her account under the Plan. No money was actually moved. Wilma simply ended up with a "rollover" recordkeeping account in her name and will be issued a 2007 IRS Form 1099-R reflecting the direct rollover of the death benefit.

Since the rollover of Fred's balance to Wilma's account was not effected until 2007, am I correct in assuming that this rollover amount is NOT included in Wilma's 12/31/06 Plan balance for purposes of calculating her 2007 RMD - but will be included in her 12/31/07 Plan balance for purposes of calculating her 2008 RMD?

Consequently, Fred's Plan balance was not (need not have been?) included in any RMD calculation for either 2006 or 2007?

Just trying to make sure I've got my "head screwed on straight" on this one.

Thanks for any and all comments, confirmations, clarifications, etc.

[SMB]

No takers? Is it because it's patently obvious or thoroughly confusing (my status)?

[Bird]

I think there's a flaw in your reasoning that results in an RMD from Fred's account being skipped entirely for 2007. I'm pretty sure this is how it should shake out:

Fred's required beginning date was 4/1/2007, so he must have turned 70 1/2 in 2006. He died in 2006, before his RBD, so Wilma must begin distributions from his account by the later of 1) the end of the calendar year immediately following the calendar year in which he died [he died in 2006 so that would be 2007], or 2) the end of the calendar year in which he would have reached age 70 1/2 [2006].

So RMDs to Wilma from Fred's account are required to begin in 2007. That means that if you rolled over the entire account, you should have first processed an RMD (based on her life expectancy in 2007, the year following his death) and then rolled over the rest.

No worries; the fix for an ineligible rollover is to just take out the ineligible portion (i.e. the RMD) from her account. I think I'd just show the full rollover and then report the taxable RMD from her account (I believe correct reporting would show an RMD taxable amount from his account and the balance rolled over, and a non-taxable distribution of the excess rolled over coming back out of her account, but that's likely to get messed up and ultimately if you just take it from her account you get where you want to from a tax standpoint).

[SMB]

Bird,

I suspected that "something" needed to be distributed from the late Fred's account for 2007, but wasn't sure what, when and to whom.

Thanks for taking the time to analyze my situation and reply. Much appreciated.

SMB

[masteff]

Bird's right on. If Fred didn't get it taken, then Wilma has to. And I agree that the right amount of money needs to come out of the plan now regardless of which account it's in.

[jevd]

The amount of the distribution from wilma's account should include earnings as this is the return of an excess rollover. It should be coded on the 1099R as an 8. Rollover corrected in the year of excess. Wilma's RMD for 07 should be coded as normal distribution code 7. I believe this applies to Qualified Plans as well as IRAs but now I'm not sure. Anyone familiar with excess rollovers to Qualified Plans?

[Bird]

jevd's right, proper reporting would be to reflect earnings on the improper rollover. I was thinking that since the RMD could have been taken as late as Dec 31, no harm/no foul, but yes, it did become an excess rollover the minute it went in. Much marginal hassle for little marginal accuracy; oh well, we're all used to that, right?!

[Appleby]

I think there's a flaw in your reasoning that results in an RMD from Fred's account being skipped entirely for 2007. I'm pretty sure this is how it should shake out:

Fred's required beginning date was 4/1/2007, so he must have turned 70 1/2 in 2006. He died in 2006, before his RBD, so Wilma must begin distributions from his account by the later of 1) the end of the calendar year immediately following the calendar year in which he died [he died in 2006 so that would be 2007], or 2) the end of the calendar year in which he would have reached age 70 1/2 [2006].

So RMDs to Wilma from Fred's account are required to begin in 2007. That means that if you rolled over the entire account, you should have first processed an RMD (based on her life expectancy in 2007, the year following his death) and then rolled over the rest.

No worries; the fix for an ineligible rollover is to just take out the ineligible portion (i.e. the RMD) from her account. I think I'd just show the full rollover and then report the taxable RMD from her account (I believe correct reporting would show an RMD taxable amount from his account and the balance rolled over, and a non-taxable distribution of the excess rolled over coming back out of her account, but that's likely to get messed up and ultimately if you just take it from her account you get where you want to from a tax standpoint).

Are we sure?… A friend and I have been discussing a similar issue at length, and it seems to me that Wilma had until December 30 to rollover the balance of Fred’s account, without being required to take an RMD.

If she waited until December 31, then she is required to take an RMD for 2007, based on her life expectancy.

[Appleby]

Bird's right on. If Fred didn't get it taken, then Wilma has to. And I agree that the right amount of money needs to come out of the plan now regardless of which account it's in.

Masteff,

This would be her post-death RMD, not Fred’s RMD. Since Fred died before his RBD, then he has no RMD.

Notwithstanding, if Wilma rollover over the amount before December 31, she has no RMD for 2007 for the amount she inherited from Fred.,

[Bird]

Notwithstanding, if Wilma rollover over the amount before December 31, she has no RMD for 2007 for the amount she inherited from Fred.,

Are you saying that if she rolls over any day between Jan 1 and Dec 30, there is no RMD for 2007, but if she rolls over on Dec 31 there is?

I disagree. Distributions must begin in 2007, as I described. If she rolled over the entire amount some of it was ineligible.

[Guest mjb]

Notwithstanding, if Wilma rollover over the amount before December 31, she has no RMD for 2007 for the amount she inherited from Fred.,

Are you saying that if she rolls over any day between Jan 1 and Dec 30, there is no RMD for 2007, but if she rolls over on Dec 31 there is?

I disagree. Distributions must begin in 2007, as I described. If she rolled over the entire amount some of it was ineligible.

Bird: You got a cite for the statement that distributions from Fred's account must must be taken by Wilma in 2007.

Under the RMD rules if an owner dies after reaching 70 1/2 but before April first of the next year, no MRD is required because death occurred before the required beginning date (IRS pub 590 P 31 col 2). Fred died in the year he reached 70 1/2 but before he was required to take MRD ( 4/1).

Wilma's RMD for 06 is based on her account balance as of 12/31/05 which does not include Fred's account.

Wilma's RMD for 07 is based on her account balance as of 12/31/06 which does not include Fred's account.

Wilma's RMD for 08 is based on her account balance as of 12/31/07 which includes the rollover from Fred's account in 2007.

[masteff]

Enough.... I've dug out the regs so we can put this to bed.

Here's what Bird quoted (though w/out the full citation) above...

Reg 1.401(a)(9)-3 Q&A-3

(b) Spousal beneficiary. In order to satisfy the rule in section 401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the employee's surviving spouse, distributions must commence on or before the later of—

(1) The end of the calendar year immediately following the calendar year in which the employee died; and

(2) The end of the calendar year in which the employee would have attained age 70½.

Emphasis #1: ON OR BEFORE

Emphasis #2: THE LATER OF

In the case where the employee (Fred) dies in the year he would have attained age 70.5 (ie subparagraph 2), then subparagraph 1 would occur later.

Therefore, by virtue of 1.401(a)(9)-3 Q&A-3(b)(1), Wilma must commence MRDs on or before 12/31/2007 with respect to the amount to which she is a surviving spouse beneficiary of Fred.

P.S. - the rollover in the original post, in my opinion, is a sham transaction (the post even says the money never left the plan). The money in the QP still represents a beneficiary account as it appears to me that only IRA's can be converted from beneficiary accounts to owner accounts by surviving spouses.

[Appleby]

That’s what I first though…and you are probably applying the same logic that I did at first, which is if an RMD is due for the year, then any distribution taken as of January 1 of the year is attributed towards the RMD until the RMD is satisfied, and any amount up to the RMD amount is not rollover eligible.

I have been going back and forth with myself as to how that plays into the Spouse beneficiary’s deadline to start post-death RMDs. The sticking point for me is §1.401(a)(9)-3-Q&A A-6 and A-3 (b), and how they play into this? Isn't the emphasis on “ the end” of the year.

[Appleby]

I had my post open and had to take a call, so I did not see your post masteff.

My response is to Bird's post

[Appleby]

Notwithstanding, if Wilma rollover over the amount before December 31, she has no RMD for 2007 for the amount she inherited from Fred.,

Are you saying that if she rolls over any day between Jan 1 and Dec 30, there is no RMD for 2007, but if she rolls over on Dec 31 there is?

I disagree. Distributions must begin in 2007, as I described. If she rolled over the entire amount some of it was ineligible.

Bird: You got a cite for the statement that distributions from Fred's account must must be taken by Wilma in 2007.

Under the RMD rules if an owner dies after reaching 70 1/2 but before April first of the next year, no MRD is required because death occurred before the required beginning date (IRS pub 590 P 31 col 2). Fred died in the year he reached 70 1/2 but before he was required to take MRD ( 4/1).

Wilma's RMD for 06 is based on her account balance as of 12/31/05 which does not include Fred's account.

Wilma's RMD for 07 is based on her account balance as of 12/31/06 which does not include Fred's account.

Wilma's RMD for 08 is based on her account balance as of 12/31/07 which includes the rollover from Fred's account in 2007.

mjb's position seems correct to me

[Appleby]

P.S. - the rollover in the original post, in my opinion, is a sham transaction (the post even says the money never left the plan). The money in the QP still represents a beneficiary account as it appears to me that only IRA's can be converted from beneficiary accounts to owner accounts by surviving spouses.

Bear in mind that this is not like an IRA, where you need to move the assets from one individuals account to the other person’s account. Under the plan, book-keeping can be sufficient. Since a 1099-R is issued to Wilma, all that needs to happen is that her FMV for her account is increased by the valued of the amount she inherited. Someone familiar with recordkeeping would be able to explain the process much better than I. Also, a spouse beneficiary can rollover inherited amounts to her 'own' retirement account as per EGTRRA. The plan may need to perform recordkeeping to show taht Wilma rolled over the amount to her own account.

[Bird]

mjb:

Bird: You got a cite for the statement that distributions from Fred's account must must be taken by Wilma in 2007.

Masteff gave it: Reg 1.401(a)(9)-3 Q&A-3. I was paraphrasing it.

Under the RMD rules if an owner dies after reaching 70 1/2 but before April first of the next year, no MRD is required because death occurred before the required beginning date (IRS pub 590 P 31 col 2).

Could I ask what year's Pub you refer to? I checked both 2006 and 2007 and the page number is off; the relevant sections appear to be on pp 35-36 and I don't see what you said is there.

Appleby:

Isn't the emphasis on “ the end” of the year.

If you condense the cite down to the relevant words it comes out:

distributions must commence on or before...the end of the calendar year in which the employee would have attained age 70½.

EDIT: Oops, I meant to say:

distributions must commence on or before...the end of the calendar year immediately following the calendar year in which the employee died

P.S. I think Masteff's P.S. is accurate. It should still be titled as a beneficiary account in the plan.

So they must commence on or before 12/31/07. If you can spell out for me how you think that should be interpreted, I might understand better, but I'm not following.

[Appleby]

P.S. I think Masteff's P.S. is accurate. It should still be titled as a beneficiary account in the plan.

Are you saying she cannot rollover the inherited amount to her own account?

Regarding the other issue...I know PLRs cannot be relied on, but I still want to refer to 200222033. Take a look at request ruling # 1 and the IRS’ response. The IRS seems to think that the entire balance was rollover eligible, as none of it was considered an RMD. And they appear to hinge the determination on the 'end of the year'.

[Guest mjb]

mjb:

Bird: You got a cite for the statement that distributions from Fred's account must must be taken by Wilma in 2007.

Masteff gave it: Reg 1.401(a)(9)-3 Q&A-3. I was paraphrasing it.

Under the RMD rules if an owner dies after reaching 70 1/2 but before April first of the next year, no MRD is required because death occurred before the required beginning date (IRS pub 590 P 31 col 2).

Could I ask what year's Pub you refer to? I checked both 2006 and 2007 and the page number is off; the relevant sections appear to be on pp 35-36 and I don't see what you said is there.

Appleby:

Isn't the emphasis on “ the end” of the year.

If you condense the cite down to the relevant words it comes out:

distributions must commence on or before...the end of the calendar year in which the employee would have attained age 70½.

P.S. I think Masteff's P.S. is accurate. It should still be titled as a beneficiary account in the plan.

So they must commence on or before 12/31/07. If you can spell out for me how you think that should be interpreted, I might understand better, but I'm not following.

Cite has been moved to col 2 of P 33 of IRS Pub 590.

Reg 1.401(a)(9)-3 Q 1 - If an employee dies before the employee's RBD, distribution must made in accordance with provisions in IRC 401a9Bii,ii or iv. One method, the 5 yr rule in Bii requires distribution of the employee's entire account balance within 5 yrs of the employee's death.

Since the benefits can be deferred until 5 yrs after the yr of the employee's death the spouse is not required to take a MRD of H's account in 07.

[masteff]

Appleby - the spouse has the option to covert a beneficiary IRA to an owner IRA. This is what that PRL is addressing. It's specifically a provision of 408 that allows this. EDIT: I don't have time right now to go back and look at the EGTRRA provision that allowed spouse rollover to another plan. I'll have to hold off on saying rollover is fully sham... I can tell you it's not how we administered it. I'll get back to that later and post a follow up.

MJB - yes, you could probably invoke the 5-yr rule. However the original post indicates the spouse wants to take the MRDs, just not earlier than required. There is no indication that "Wilma" wants to take the money out w/in 5 yrs but the OP does indicate intention to take over life expectancy. The point is not to avoid the MRD entirely but to not force it until the latest possible date. (And there's still a school of thought that even under the 5-yr rule the bene must take MRDs; it's certainly the most conservative approach from the plan's perspective; plan language would certainly come into play).

[Guest mjb]

Where is the authority for requiring that Fred's MRD for 2006 must be taken by Wilma in 07? Neither the regs nor pub 590 require it. Show me where reg 1.401(a)(9)-3 Q-1 requires a MRD for an employee who dies in the year age 70 1/2 is attained but before April 1 of the following yr. I have always understood the rule to be that there is no MRD for the year in which an employee attains 70 1/2 if the employee dies before the following April 1 because MRDs are not required until April 1. Correct me if I am wrong but Wilma's MRD for 2007 is based on the account balance in her IRA as of the end of 2006. Until Fred's account is transferred to her IRA it is not counted for a MRD from her account. If the funds move to Wilma's IRA in 07 it is counted for her MRD to be taken in 08. Under who's account is a MRD required to be taken in 07-Fred or Wilma?

[Appleby]

Appleby - the spouse has the option to covert a beneficiary IRA to an owner IRA. This is what that PRL is addressing. It's specifically a provision of 408 that allows this. EDIT: I don't have time right now to go back and look at the EGTRRA provision that allowed spouse rollover to another plan. I'll have to hold off on saying rollover is fully sham... I can tell you it's not how we administered it. I'll get back to that later and post a follow up.

The PLR addresses the issue of whether the surviving spouse needs to take an RMD amount , before rolling over the inherited plan balance…if the rollover occurs in the year the decedent would have reached age 70 ½, but before the end of the year.

As far as whether Wilma can rollover Fred’s balance to her own account under the plan, see

IRC § 402©(9) ROLLOVER WHERE SPOUSE RECEIVES DISTRIBUTION AFTER DEATH OF EMPLOYEE. --If any distribution attributable to an employee is paid to the spouse of the employee after the employee's death, the preceding provisions of this subsection shall apply to such distribution in the same manner as if the spouse were the employee.

For distributions that occurred pre-EGTRRA, the spouse could rollover these amounts only to a traditional IRA, as ‘eligible retirement plans’ were limited to traditional IRAs for that purpose.

EGTRRA §641(d) expanded the definition of eligible retirement plan for this purpose, to include all other plans that are included in the general definition of eligible retirement plan. Remember that this was part of the expanded portability under EGTRRA

Plans are not required to accept these, or any other rollovers. Maybe your plan is designed not to accept these rollovers?

It the plan permits such rollvers, then that would be consistent with the providions of the Tax Code

[masteff]

Bird, once again, was right from the beginning.

Fred died before 12/31/06. Therefore Wilma, as beneficiary, was the owner of the account, even if the account was not transferred to her on paper until 2007. The regulations say she must take an MRD on or before the last day of 2007. This rule applies to the calendar year (scroll up and read it). The obligation to take the MRD attached to the money at 1/1/07 (even if it could be delayed to 12/31). Therefore, the amount of the MRD was not rollover eligible. Which is what Bird said at the very beginning, just in less words. As said above, whether it's done as a correction or an MRD, the money has to come back out.

The PLR doesn't apply because in that case, the money was rolled over before the required beginning date. In the case here, the obligation attached to the money on 1/1/07 and the rollover occured after that. So whether it's a beneficiary or owner account is moot.

[Guest mjb]

Bird, once again, was right from the beginning.

Fred died before 12/31/06. Therefore Wilma, as beneficiary, was the owner of the account, even if the account was not transferred to her on paper until 2007. The regulations say she must take an MRD on or before the last day of 2007. This rule applies to the calendar year (scroll up and read it). The obligation to take the MRD attached to the money at 1/1/07 (even if it could be delayed to 12/31). Therefore, the amount of the MRD was not rollover eligible. Which is what Bird said at the very beginning, just in less words. As said above, whether it's done as a correction or an MRD, the money has to come back out.

The PLR doesn't apply because in that case, the money was rolled over before the required beginning date. In the case here, the obligation attached to the money on 1/1/07 and the rollover occured after that. So whether it's a beneficiary or owner account is moot.

M: You still havent provided a cite for your theory that Wilma must take a MRD from Fred's account or explain why reg 1.401(a)(9)-3 A 1 which states that a MRD is not required if employee dies prior to the MRD, April 1, and states that a distribution must be made in accordance with IRC 401(a)(9)(B) which includes the 5 year deferral permitted under (b)(ii) is not applicable. Reg 1.401(a)(9)-3 A-2 states unequivocally that distribution of the employee's entire interest can be deferred until the end of the 5th tax year after death. You havent offered any basis for concluding that A-1/2 are not substantial authority for deferring a MRD after the employee's death that taxpayers can rely on.

[Bird]

mjb:

Cite has been moved to col 2 of P 33 of IRS Pub 590.

Ah. Yes, it says no RMD is required. Unfortunately, they are talking about lifetime distributions to the owner so it is not relevant to this discussion. Clearly, we are talking about death before the required beginning date and we have been talking about death distributions all along.

appleby:

The PLR appears to support your position. There are some differences; in the PLR, the spouse is younger than the participant so distributions had to begin before the end of the year in which the spouse turned 70 1/2 (incidentally I messed up my condensation of the regs a few posts ago and will edit it to say that in the case we're talking about, distributions must begin by the end of the year following the year of death, not the end of the year in which the spouse turned 70 1/2). I'm not sure that distinction is all that relevant though, so you clearly have some good ammo there. Essentially it says you can beat the "distributions must commence by" clock by doing a rollover in the year during which they must commence as long as you do it before the end of the year. Frankly, I still have a problem with that...at the moment I'm not sure if I'll dig any deeper or not.

As for using the 5-year rule, I didn't think it was possible to use the five year rule and then do a rollover, thereby delaying RMDs. If the PLR is right, then maybe you can (even though the 5-year rule isn't in the PLR, the same logic of "distributions must commence by" and rolling over to beat the clock might apply.)

[Guest mjb]

Bird:

You obviouly have not read my most recent post based upon the final reg 1.401(a)(9)-3 A-1 noted below which clearly states that Wilma can defer commencement of distributions for 5 years which means that she can elect a rollover any any time up to Dec 31, 2011. Please provide a cite to the regulation that requires that Wilma must take a MRD in 2007 from Fred's account. Neither you or masteff have come up with any contrary authority in any of your posts.

Bird, once again, was right from the beginning.

Fred died before 12/31/06. Therefore Wilma, as beneficiary, was the owner of the account, even if the account was not transferred to her on paper until 2007. The regulations say she must take an MRD on or before the last day of 2007. This rule applies to the calendar year (scroll up and read it). The obligation to take the MRD attached to the money at 1/1/07 (even if it could be delayed to 12/31). Therefore, the amount of the MRD was not rollover eligible. Which is what Bird said at the very beginning, just in less words. As said above, whether it's done as a correction or an MRD, the money has to come back out.

The PLR doesn't apply because in that case, the money was rolled over before the required beginning date. In the case here, the obligation attached to the money on 1/1/07 and the rollover occured after that. So whether it's a beneficiary or owner account is moot.

M: You still havent provided a cite for your theory that Wilma must take a MRD from Fred's account or explain why reg 1.401(a)(9)-3 A 1 which states that a MRD is not required if employee dies prior to the MRD, April 1, and states that a distribution must be made in accordance with IRC 401(a)(9)(B) which includes the 5 year deferral permitted under (b)(ii) is not applicable. Reg 1.401(a)(9)-3 A-2 states unequivocally that distribution of the employee's entire interest can be deferred until the end of the 5th tax year after death. You havent offered any basis for concluding that A-1/2 are not substantial authority for deferring a MRD after the employee's death that taxpayers can rely on.

[Bird]

mjb, I did respond about the 5-year rule. I don't think it can be used to defer a distribution and then roll over. The five year rule says you have to take a complete distribution within 5 years, and I believe that means that any distribution taken after electing the 5 year rule is an RMD, ineligible for rollover. The IRS made that clear with non-spouse rollovers in a notice earlier this year, and I think the same logic applies. But, there was never any indication that the 5 year rule was elected or would be a default election in this case anyway so I don't think it's applicable.

And I have given the cite, as has Masteff, for our position. And before you get testy about non-responsiveness, how about acknowledging the fact that you wasted my time, and anybody else who took the time to look it up, when you provided an inapplicable cite in an outdated publication? I have no problem with someone being wrong, myself included, but an "oops/my bad" doesn't hurt when applicable.

Appleby, I've given it some thought and stand by my original position, PLR notwithstanding. It may sound arrogant and/or stubborn, but I think they got it wrong in allowing a rollover of the full amount. A quick recap, without cites, goes like this: Distributions must commence by 12/31/07. What's the minimum amount? Account balance divided by the applicable life expectancy. That amount is a required minimum and is ineligible for rollover. I recognize what you're saying about doing it before the end of the year, and I recognize I am applying some lifetime distribution logic to this situation, but I think it is appropriate. It's weird, at best, that doing a rollover on Dec 30 means no RMD is due but on Dec 31 means one is due.

If that's not true, then you get odd results. If Fred had died the year before or the year after, either he or Wilma would have to take an RMD from his account in 2007. Just happening to die in 2006 means that the RMD is skipped for 2007? Logic doesn't always apply, but that doesn't make any sense to me.

[Appleby]

It may sound arrogant and/or stubborn.

FWIW, I don't think it sounds that way at all...

[Appleby]

mjb, I did respond about the 5-year rule. I don't think it can be used to defer a distribution and then roll over. The five year rule says you have to take a complete distribution within 5 years, and I believe that means that any distribution taken after electing the 5 year rule is an RMD, ineligible for rollover. The IRS made that clear with non-spouse rollovers in a notice earlier this year, and I think the same logic applies.

Bird,

Take a look at Notice 2007-7

A-17 (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.

[Bird]

Appleby-

Oops/my bad. You're right, I didn't cite that correctly. You can indeed rollover, but then you still have to take it out (of the IRA) within 5 years. My point was that you can't invoke the 5 year rule, then do a rollover and use the life expectancy rule from the rollover.

[masteff]

Let's not get ahead of ourselves....

To excerpt from Appleby's post above:

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).

Let me repeat that last bit... 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

You do not beat the MRD process by doing the rollover in the 5-year period. Once the beneficiary has elected the 5-year option, the money must go out by the end of the fifth year regardless of all other factors.

So unless you want Wilma to pay the full tax burden on the account in year 5, then the 5-year rule is not an option.

By the way, mjb, there's your cite, Q&A-19.

[Bird]

Thanks Masteff, that's the point I was trying to get across, not very well...

[Guest mjb]

Let's not get ahead of ourselves....

To excerpt from Appleby's post above:

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).

Let me repeat that last bit... 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

You do not beat the MRD process by doing the rollover in the 5-year period. Once the beneficiary has elected the 5-year option, the money must go out by the end of the fifth year regardless of all other factors.

So unless you want Wilma to pay the full tax burden on the account in year 5, then the 5-year rule is not an option.

By the way, mjb, there's your cite, Q&A-19.

M: Can you or Bird explain what the relevance of Q/A-19 limitations on tax free transfers by a non spouse to an IRA under IRC 402©(11) has to limiting a rollover by a surviving spouse under IRC 402©(9)?

[Bird]

M: Can you or Bird explain what the relevance of Q/A-19 limitations on tax free transfers by a non spouse to an IRA under IRC 402©(11) has to limiting a rollover by a surviving spouse under IRC 402©(9)?

It's supporting evidence that the five year rule is not intended to be used to delay a distribution, then invoke the life expectancy rule.

[Guest mjb]

M: Can you or Bird explain what the relevance of Q/A-19 limitations on tax free transfers by a non spouse to an IRA under IRC 402©(11) has to limiting a rollover by a surviving spouse under IRC 402©(9)?

It's supporting evidence that the five year rule is not intended to be used to delay a distribution, then invoke the life expectancy rule.

But how does the application of the 5 year rule of IRC 402©(11) in Q/A-19 of Notice 2007-07 prevent a spousal rollover under IRC 402©(9)? IRC 402(a)(11) authorizes the transfer of a deceased's participant's interest in a Q plan to an inherited IRA in the name of deceased participant as a trustee to trustee transfer of the assets. It is not a rollover because 20% withholding does not apply if a transfer to an inherited IRA is not elected by the non spouse beneficiary. Under IRC 401(a)(9)(B)(ii) and (iii) a non spouse can only elect between a complete distribution not later than 5 years after the employee's death or commence peroodic payments by the end of the year after the employee's death which is substantially different from a rollover by a surviving spouse.

The right of the surviving spouse of an employee who dies before reaching his required distribution date to rollover qualified plan assets of a deceased spouse after electing a 5 year deferral is permitted under the following authority:

1. the spouse can elect to defer distribution for up to 5 years under Reg 1.401(a)(9)-3 Q/A 1 and Q/A-2.

2. the funds are not taxed until the funds are distributed to the spouse under IRC 402(a).

3.the spouse is permitted to rollover a distribution payable to a deceased spouse from a qualified plan under IRC 402(a)(9).

4. the IRS permits rollovers after age 70 1/2 is attained under Rev Rul 82-153.

[Bird]

I don't think it's a news flash that IRA rollovers are permitted after age 70 1/2, and citing a 1982 revenue ruling, pre-dating the latest regs by some 20 years, is less than helpful.

I continue to believe that if you invoke the 5-year rule (and keep in mind that there was never any evidence that the 5-year rule was invoked, directly or indirectly by plan operation) then any amounts distributed thereafter are not eligible for rollover because the 5 year rule says that all amounts must be distributed within 5 years. "Must be distributed" means they are required minimum distributions, ineligible for rollover.

NOTE TO ANY POOR SOUL WHO HAS STUMBLED ACROSS THIS THREAD AND THINKS THEY WILL FIND A CONCLUSION - I may or may not respond to future posts; don't take a lack of response as concession to an opposing point of view. I can only say the same thing so many times and have reached that limit.

[Guest mjb]

I don't think it's a news flash that IRA rollovers are permitted after age 70 1/2, and citing a 1982 revenue ruling, pre-dating the latest regs by some 20 years, is less than helpful.

I continue to believe that if you invoke the 5-year rule (and keep in mind that there was never any evidence that the 5-year rule was invoked, directly or indirectly by plan operation) then any amounts distributed thereafter are not eligible for rollover because the 5 year rule says that all amounts must be distributed within 5 years. "Must be distributed" means they are required minimum distributions, ineligible for rollover.

Bird:

Where is there a requirement under any reg that an amount that must be distributed from a plan cannot be rolled over? For example a mandatory lump sum distribution from a qual plan on account of attaining age 70 1/2 can be rolled over. If the IRS intended to prevent rollovers after end of the 5 year period by surviving spouses it could have written such a provision into the final MRD regs in 1.401(a)(9)-3. The reason there no requirement in the regs is because IRC 401(a)(9)(B) does not contain such a requirement.

[masteff]

Where is there a requirement under any reg that an amount that must be distributed from a plan cannot be rolled over?

1) It's not just any amount that must be distributed that can't be rolled over, it's MRD's that can't be rolled over. It's part of the definition of rollover eligible... certain things are excluded such as MRDs. Reg 1.402©-2 Q&A-3(b)(2).

2) It's an exclusive option between 5-years and life expectancy. You can't start the 5 years then later try to switch to life expectancy. Read the titles in 401(a)(9)... life expectancy method is an EXCEPTION to the 5 year method. In all matters tax related, once you have started down one path, you can't later invoke the exception; the exception must be invoke from the beginning.

Note to anyone reading past this post in the thread... I'm with Bird. Our case has been presented above. I'm not arguing it any further w/ someone who's only continuing to argue because he refuses to concede (past threads w/ this person show the same pattern).

[Guest mjb]

Where is there a requirement under any reg that an amount that must be distributed from a plan cannot be rolled over?

1) It's not just any amount that must be distributed that can't be rolled over, it's MRD's that can't be rolled over. It's part of the definition of rollover eligible... certain things are excluded such as MRDs. Reg 1.402©-2 Q&A-3(b)(2).

2) It's an exclusive option between 5-years and life expectancy. You can't start the 5 years then later try to switch to life expectancy. Read the titles in 401(a)(9)... life expectancy method is an EXCEPTION to the 5 year method. In all matters tax related, once you have started down one path, you can't later invoke the exception; the exception must be invoke from the beginning.

Note to anyone reading past this post in the thread... I'm with Bird. Our case has been presented above. I'm not arguing it any further w/ someone who's only continuing to argue because he refuses to concede (past threads w/ this person show the same pattern).

Masteff:

1. Why is it that neither you or Bird can provide any authority for your conclusions and ignore my citations to the applicable code and regulatory provisions.

2. If as you say once you have started down one path you can cant later invoke the exeception why does the IRS disagree with you???

In PLR 200450057 the surviving spouse of an employee was the beneficiary under a plan that required that the SS receive a distribution of the employee's entire account balance no later than 5 years the employee's death. IRS allowed spouse to make a tax free rollover of the account balance to an IRA established in the name of the deceased employee with SS as the beneficiary to allow the SS to take withdrawals from the IRA without becoming subject to the 10% premature distribution penalty. Alternatively the spouse could elect to treat the IRA as her own. The PLR cited the same provisions I have provided you as authority for allowing a tax free rollover by a surviving spouse even though the retirement plan benefit was required be paid under the 5 year rule of IRC 401(a)(9)(B)(ii).

3. Both you and Bird have continually ignored a basic principle of taxation of distributions of retirement plans which is that the surviving spouse of a participant or IRA owner is exempt from the inherited account rules of IRC 401(a)(9)(B) which require that distributions for non spouses commence under the life expectancy or 5 yr rule.

[Bird]

The PLR is irrelevant, which is no surprise. The PLAN had a 5-year rule, but under the regs RMDs weren't yet required (under age 70 1/2) so it was all eligible for rollover.

[Belgarath]

This has been interesting reading. After re-reading the Code and Regs on this, I agree with Bird and Masteff, and disagree with MJB on this one. I also will present my thoughts, and not bother with further argument, so anyone can feel free to agree or disagree, but I'm comfortable enough with it so that I don't feel the need to have further discussion.

"3. Both you and Bird have continually ignored a basic principle of taxation of distributions of retirement plans which is that the surviving spouse of a participant or IRA owner is exempt from the inherited account rules of IRC 401(a)(9)(B) which require that distributions for non spouses commence under the life expectancy or 5 yr rule."

MJ - I think you are misinterpreting the scope of this. There are minimum distribution requirements under 401(a)(9)(B) and the accompanying regulations. Under 401(a)(9)(B)(ii), the default rule if RMD's have not yet commenced is the 5 year rule.

(iii) provides a modification of this rule allowing a distribution over life expectancy if commenced within the allowable timeframes. The paragraph (iv) exception for spouses that you refer to applies ONLY to the exception to the 5 year rule contained in (iii). It does not negate the 5 year rule if the life expectancy option in (iii) is not chosen timely.

So, as the regulations make clear, the spouse has a choice to satisfy the RMD requirements - either a life expectancy commencing within the later of the timeframes of (iii) and (iv), OR the 5 year. If you choose to skip commencement under the life option, and use the 5 year option instead, then the entire distribution you receive once the life expectancy commencement period has expired, is in fact a RMD. And a RMD is most assuredly not an "eligible rollover distribution" as stated clearly in 402©(4)(B).

That's my two cents worth on the subject, anyway. If you are advising your clients in this situation that it is ok to use the 5 year rule and thus avoid RMD's, then in year 4 roll it all over to an IRA, maybe you are right, but I don't like your chances if the IRS comes looking. It would be interesting to see what would happen if you submitted a PLR request using this set of facts, rather than the set of facts contained in the PLR you refer to. I would expect an unfavorable ruling using the current set of facts under discussion. But, if you do it and get a favorable result, I will cheerfully tip my cap and commend you for a more penetrating analysis than I'm able to come up with.

[Guest mjb]

This has been interesting reading. After re-reading the Code and Regs on this, I agree with Bird and Masteff, and disagree with MJB on this one. I also will present my thoughts, and not bother with further argument, so anyone can feel free to agree or disagree, but I'm comfortable enough with it so that I don't feel the need to have further discussion.

"3. Both you and Bird have continually ignored a basic principle of taxation of distributions of retirement plans which is that the surviving spouse of a participant or IRA owner is exempt from the inherited account rules of IRC 401(a)(9)(B) which require that distributions for non spouses commence under the life expectancy or 5 yr rule."

MJ - I think you are misinterpreting the scope of this. There are minimum distribution requirements under 401(a)(9)(B) and the accompanying regulations. Under 401(a)(9)(B)(ii), the default rule if RMD's have not yet commenced is the 5 year rule.

(iii) provides a modification of this rule allowing a distribution over life expectancy if commenced within the allowable timeframes. The paragraph (iv) exception for spouses that you refer to applies ONLY to the exception to the 5 year rule contained in (iii). It does not negate the 5 year rule if the life expectancy option in (iii) is not chosen timely.

So, as the regulations make clear, the spouse has a choice to satisfy the RMD requirements - either a life expectancy commencing within the later of the timeframes of (iii) and (iv), OR the 5 year. If you choose to skip commencement under the life option, and use the 5 year option instead, then the entire distribution you receive once the life expectancy commencement period has expired, is in fact a RMD. And a RMD is most assuredly not an "eligible rollover distribution" as stated clearly in 402©(4)(B).

That's my two cents worth on the subject, anyway. If you are advising your clients in this situation that it is ok to use the 5 year rule and thus avoid RMD's, then in year 4 roll it all over to an IRA, maybe you are right, but I don't like your chances if the IRS comes looking. It would be interesting to see what would happen if you submitted a PLR request using this set of facts, rather than the set of facts contained in the PLR you refer to. I would expect an unfavorable ruling using the current set of facts under discussion. But, if you do it and get a favorable result, I will cheerfully tip my cap and commend you for a more penetrating analysis than I'm able to come up with.

It is both amusing and amazing that all of you have not bothered to research the tax law provision determining when MRDs must be distributed under the 5 year rule.

Reg. 54.4974-2 Q-3 provides the following answer to the question of when a taxable distribution for MRD purposes occurs under the 5 yr rule:

Q-3 If a payee's interest under a qualified retirement plan is in the form of an individual account how is the MRD for a given calendar year determined for purposes of IRC 4974 (50% excise tax).

A-3(a) The amount of the MRD for any calendar year for the purposes of IRC 4974 will be the MRD amount required to be distributed for the calendar year in order to satisy the the MRD requirement in reg. 1.401(a)(9)-5 as provided in the following sections:

(1) In the case of plan described in IRC 401(a), Section 401(a)(9) and reg 1.401(a)(9)-1 through -5.

.........

A-3© Five year rule. If the 5 year rule of IRC 401(a)(9)(B)(ii) applies to the distribution to a payee, no amount is required to be distributed for any calendar year to satisfy the applicable enumerated section in paragraph (a) of this A-3 until the calendar year which contains the date 5 years after date of the employee's death. For the calendar year which contains the date 5 years after the employee's death, the MRD required to be distributed to satisfy the applicable enumerated section is the payee's entire remaining interest in the qualfied retirement plan.

After reading the above regulation do you have the answer to the question of whether a rollover is permitted by the surviving spouse in the fourth year?

[Belgarath]

Well, I said I wouldn't reply, but now I must, because MJB is right and I was wrong. I stand corrected! I love these discussions - they provide innumerable ways to find out why I'm wrong.

However, MJ - I do have a question, based upon your earlier post # 26 -

"You obviouly have not read my most recent post based upon the final reg 1.401(a)(9)-3 A-1 noted below which clearly states that Wilma can defer commencement of distributions for 5 years which means that she can elect a rollover any any time up to Dec 31, 2011."

It appears to me that under the Q&A 3© that you reference, that since Fred died in 2006, then no rollover is possible in 2011. The rollover would have to be completed by 12/31/2010, since 2011 contains the 5th anniversary of death. Agree?

And thanks for setting me straight on this reg.

[jevd]

I want to thank everyone for the professional and highly interesting discussion.

[masteff]

After reading the above regulation do you have the answer to the question of whether a rollover is permitted by the surviving spouse in the fourth year?

mjb - We never truly disputed that a spouse could or could not do a rollover in the 4th year. Going back to the fact pattern in the original post, what Wilma cannot do is take a rollover in year 4 and then switch to life expectancy because she had to make an irrevokable choice in year 1 between the 5-yr rule and life expectancy. The choice is irrevokable because the 1.409(a) regs say the choice is made at the earliest date a distribution is required under either 5-yr or life expectancy, which we established above is the year after Fred's death. That choice follows the rollover and is binding upon the money when it's in the IRA (which is evidenced by the IRS's language in the Q&A-19 referenced above).

[Bird]

I've read the new posts and for the record, (still) agreed with Masteff. To be fair, I think I said you couldn't do a rollover at all after using the five year rule, and yes, I suppose you could do a rollover, but the new IRA would carry with it the five year election - you can't use the five year rule and then convert to the life expectancy method. That's the gist of the discussion.

[Guest mjb]

After reading the above regulation do you have the answer to the question of whether a rollover is permitted by the surviving spouse in the fourth year?

mjb - We never truly disputed that a spouse could or could not do a rollover in the 4th year. Going back to the fact pattern in the original post, what Wilma cannot do is take a rollover in year 4 and then switch to life expectancy because she had to make an irrevokable choice in year 1 between the 5-yr rule and life expectancy. The choice is irrevokable because the 1.409(a) regs say the choice is made at the earliest date a distribution is required under either 5-yr or life expectancy, which we established above is the year after Fred's death. That choice follows the rollover and is binding upon the money when it's in the IRA (which is evidenced by the IRS's language in the Q&A-19 referenced above).

After all this discussion you and bird still dont understand that the IRS response in A-19 of Notice 2007-07 does not apply to a spouse's election of the 5 yr rule because A-19 applies only to transfers by non spouses which by definition in IRC 401©(11) are a trustee to trustee transfer of an inherited IRA owned in the name of the deceased participant. After the transfer the account will still be held in the name of the deceased participant. Under IRC 401©(9) the surviving spouse can rollover the deceased spouse's interest in a qualified plan to his/her own IRA or plan account in which the RMDs are based on the surviving spouse's life expectancy. Reg 54-4974-2 A-3© states that mandatory distibutions under the 5 yr rule does not occur until the 5th yr after the death of the participant. In PLR 200242044 the IRS held that A-3© allowed a surviving spouse beneficiary who previously made an election under the 5 yr rule, to rollover the remaining amount in the deceased husband's IRA at the end of the 4th year to an IRA in her own name. Under Reg 1.401(a)(9)-7 Q/A-2 a rollover of a deceased spouse's benefit by a surviving spouse to a retirement plan account of the spouse results in an increase in the value of the surviving spouse's account for the purpose of MRDs to be received under the surviving spouse's plan interest. Under 1.401(a)(9)-7 A-3 the rollover of such interest is not treated as a distribution by the transferring plan but is instead treated as a reduction of the amount held under the transferring plan. Therefore if all of Fred's interest in the plan is rolled over to Wilma's account by the end of the 4th yr after Fred's death, the amount of the MRD from Fred's account under the plan required in the 5th yr is 0. Wilma's MRD from her account under the plan in yr 5 will based on her life expectancy.

B: I agree with you that the transfer of a deceased spouse's interest in a Q plan after the 5 yr rule is elected must be made by the end of th 4th yr after year of death. However, under the rules for IRAs if the surviving spouse fails to receive a distribution from the IRA by the end of the fifth yr, the surviving spouse is deemed to have elected to treat the deceased's IRA as his/her own and the MRD will determined under the rules for the surviving spouse, e.g, no MRD until the spouse attains age 70 1/2.

[masteff]

she had to make an irrevokable choice in year 1 between the 5-yr rule and life expectancy. The choice is irrevokable because the 1.409(a) regs say the choice is made at the earliest date a distribution is required under either 5-yr or life expectancy, which we established above is the year after Fred's death. That choice follows the rollover and is binding upon the money when it's in the IRA

mjb - please explain how the code sections you're citing allow the spouse to revoke an irrevokable election to take distributions over 5 years. 1.401(a)(9)-3 Q&A-4© explicity says "the election must be irrevocable with respect to the beneficiary and must apply to all subsequent calendar years."

And please stop citing that PLR as it applies to a case where the rollover was made prior to the required beginning date, thus making it materially different from the fact pattern in this thread.

[Guest mjb]

she had to make an irrevokable choice in year 1 between the 5-yr rule and life expectancy. The choice is irrevokable because the 1.409(a) regs say the choice is made at the earliest date a distribution is required under either 5-yr or life expectancy, which we established above is the year after Fred's death. That choice follows the rollover and is binding upon the money when it's in the IRA

mjb - please explain how the code sections you're citing allow the spouse to revoke an irrevokable election to take distributions over 5 years. 1.401(a)(9)-3 Q&A-4© explicity says "the election must be irrevocable with respect to the beneficiary and must apply to all subsequent calendar years."

And please stop citing that PLR as it applies to a case where the rollover was made prior to the required beginning date, thus making it materially different from the fact pattern in this thread.

Where is there a revocation of the election since Reg 54.4974-2 A-3© permits the spouse to take a distribution at any time during the 5 year period after death? However the funds are not considered a MRD until the fifth year. As noted in the PLRs any distribution prior to the 5th year is eligible for a rollover because the funds are not a MRD under 401(a)(9)(B)(ii) until the fifth year after the owner's death. Secondly, unlike a non spouse beneficary the spouse has the right to rollover the funds to an IRA/plan account in the spouse's name which will allow the benefits to be paid over the spouse's life regardless of whether the spouse is over age 70 1/2. See IRC 402©(9). There is a substantive difference in distribution rights between a surviving spouse who receives benefits as the beneficiary of a deceased's spouse plan account and a spouse who rolls over the benefits of a deceased spouse over to an account/IRA in the surviving spouse's name. For example, a spouse who is under age 70 1/2 and commences benefits as a beneficiary of a deceased spouse after date the deceased spouse would have attained 70 12/ can always rollover the funds to an IRA in the spouse's name and stop the distributions.

I will stop citing the PLR when you provide authority which states that a rollover cannot be made after the required beginning date since the 5 yr rule applies where the participant dies prior to April 1 of the year after attaining age 70 1/2, see reg Reg 1.401(a)(9)-3 Q/A-1, and IRC 401©(9) permits rollovers by a surviving spouse at any age.

[Bird]

Well, rock my world, this is a different PLR and I believe mjb has found an acorn that is at least not totally irrelevant to this discussion. The PLR allows a spouse who was taking an irrevocable 5-year stream to do a rollover of the fourth year's distribution, after receiving 3 taxable distributions already. Presumably the 5th year would not be eligible for rollover.

I note that the PLR specifically says it is using the 1987 proposed regs, not the 2002 regs for its basis. And we don't know how old the spouse is, which I think is important. But at least it is not utterly and completely irrelevant, as were prior citations.