IRS Notice 2008-30

[Guest proyce]

Does anyone else wonder about the statutory authority for a couple of transactions set forth in Notice 2008-30? Specifically,

1. The Notice allows nonspouse beneficiaries of deceased plan participants to complete a direct rollover to an inherited Roth IRA, pursuant to IRC §402©(11). A reading of §402©(11) tell us that these rollovers can be made to an individual retirement plan described in clause (i) or (ii) of §402©(8)(B) for a designated beneficiary who is not the surviving spouse.

Clauses (i) and (ii) of §402©(8)(B) mean an individual retirement account or annuity described is sections 408(a) and 408(b), respectively. These are traditional IRAs. Roth IRAs are described in §408A, and are not, as far as I know, eligible retirement plans under §402©(8)(B). So, how can these beneficiaries roll to Roth IRAs?

2. The Notice also allows spouse beneficiaries of deceased plan participants to roll to an inherited Roth IRA. I cannot find any authority that allows a spouse to do this. §402©(11) specifically states that the rollover must be done by someone other than a spouse; and also states that the rollover must be made into an inherited IRA described in §408(d)(3)©. A reading of §408(d)(3)© tells us that an IRA shall be treated as inherited if such individual is not the surviving spouse. So, how can a spouse beneficiary roll to an inherited IRA?

I have other concerns about the Notice as well, but these two will do to start a discussion.

[masteff]

See section 824 of PPA 2006. It contains a n amendment to IRC sec 408A and is the missing piece you're looking for. Effective for distributions after 12/31/07.

http://www.dol.gov/ebsa/pdf/ppa2006.pdf

Edit: PPA sec 829 too.

[Guest proyce]

See section 824 of PPA 2006. It contains a n amendment to IRC sec 408A and is the missing piece you're looking for. Effective for distributions after 12/31/07.

http://www.dol.gov/ebsa/pdf/ppa2006.pdf

Edit: PPA sec 829 too.

Here is §408A(e) as amended by PPA:

(e) Qualified Rollover Contribution. For purposes of this section, the term "qualified rollover contribution" means a rollover contribution-

(1) to a Roth IRA from another such account'

(2) from an eligible retirement plan, but only if-

(A) in the case of in individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and

(B) in the case of any eligible retirement plan (as defined in section 402©(8)(B) other than clauses (i) and (ii) thereof), such rollover contribution meets the requirements of section 402©, 403(b)(8), or 457(e)(16), as applicable.

For purposes of section 408(d)(3), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.

Let's look at this. Paragraph (2)(A) refers to rollovers to Roth IRAs from traditional IRAs, and says that the rollover must meet the requirements of §408(d)(3). We know that §408(d)(3)© denies rollovers of inherited IRAs. Therefore, inherited traditional IRA assets cannot be rolled to a Roth IRA.

Paragraph (2)(B) refers to rollovers from eligible retirement plans to Roth IRAs, and says that the rollover must meet the requirements of sections 402©, 403(b)(8), or 457(e)(16). These sections all refer to the rules of §402, which allow the employee to complete either a rollover or direct rollover to an individual retirement plan described in clauses (i) and (ii) of §402©(8)(B) - which are traditional IRAs.

We know that through the application of §408A(e) that an employee can complete a rollover or direct rollover to a Roth IRA, as long as he/she satisfies the $100,000 MAGI requirement. But what about beneficiaries of these plans? We also know that a spouse beneficiary is treated as the employee for rollover purposes [§402©(9)], so the spouse beneficiary could roll to his/her own Roth IRA if he/she satisfies the MAGI requirement.

Where is the statutory authority found for nonspouse beneficiaries of these plans complete a rollover? That authority is found in §402©(11). Remember that in order to roll to a Roth IRA, the rollover must satisfy §402©. So, §402©(11) tells us that nonspouse beneficiaries, and only nonspouse beneficiaries, can complete a direct rollover to an individual retirement plan described clauses (i) and (ii) of §402©(8)(B). Those are traditional IRAs only.

I can see how IRS wanted to be nice to beneficiaries, but I do not think the statutory authority is there - especially for a spouse to roll to an inherited Roth IRA. Notice 2008-30 cites §402©(11) as the authority, but §402©(11) clearly only includes traditional IRAs. IRS says beneficiaries can roll to Roth IRAs, but it brings up a host of issues regarding Roth IRAs (what about the five taxable year period?), §402©(8)(B), spouse rollovers to inherited Roths (how are life expectancy payments calculated? Notice 2007-7 only discusses nonspouse beneficiaries, and yet Notice 2008-30 sends us there), recharacterizations from inherited Roth accounts to inherited traditional IRAs, and some other issues.

I don't have any personal objection to allowing nonspouse beneficiaries to roll to a Roth IRA. I'm not sure how many will take advantage of it. It just seems odd to see IRS allowing something without specific statutory authority. I just wanted to see if anyone else thought like this.