Non spouse beneficiary

[Gary]

A DB plan provides for the 5 year rule for payment to a non spouse beneficiary.

If say a participant dies on July 1, 2010 at age 65 (i.e. < RBD) can the adult child beneficiary choose to roll over the death benefit (act equiv of pension) of 100k to an inherited IRA prior to 12/31/2011 and begin receiving payments over their life expectancy?

Say this same individual has an IRA could the IRA become an inherited IRA to adult child and be paid in same manner as above?

Say in the case of the DB plan above the child waits until 2012 to roll over the death benefit into an inherited IRA account. Does this mean that the inherited rollover account must be distributed by 12/31/15 and be subject to tax and the 10% early payment penalty if child is under 59 1/2?

Thanks.

[Guest Sieve]

I believe the answers are Yes, Yes, and Yes--except that, if the distribution in your last example is on account of death (which it would be in an inherited IRA, since the IRA cannot be treated as owned by the non-spouse benefiiciary), then there is no early distribution tax (see IRC Section 72(t)(2)(A)(i)).

[Gary]

Thanks Sieve,

Now if the individual is receiving payments under the life expectancy rule for a few years and then decides he wants the remaining balance of the inherited IRA in a lump sum. I presume that this also would not be subject to the 10% early penalty?

[Guest Sieve]

I think all distributions directly to a non-spouse beneficiary are on account of death, and thus not subject to the excise tax (as opposed to distributions to a spouse who has elected to treat the IRA as his/her own, in which case distributions would then not be on account of death).

[Gary]

Thank you Sieve.

So in conclusion if an adult child is a beneficiary of an IRA or pension, it is a taxable event within 5 years. That is, not able to be deferred to age 70 1/2 as a personal IRA for example?

[Guest Sieve]

Not exactly (see 2nd paragraph of your 1st post). I.e., can receive payments over life expectancy, but cannot defer the commencement of distributions to age 70-1/2.

[Gary]

Right. I was meaning that taxation could not be deferred indefinitely whether as a life payment or a lump sum there would be some taxable event.

Thanks

[Guest Sieve]

Yes. Includible in gross income when paid.