Spouse as beneficiary--5 year rule

[jkharvey]

Husband and wife own the business and both are participants in the 401k plan. Husband dies before his RBD and wife elects the 5 year rule for distributions. Is it possible for her to "rollover" the assets from his account into her account in this same plan to satisfy the 5 year distribution rule?

[ETA Consulting LLC]

The 5 year rule applies only when the participant dies before the RBD and the spouse is NOT the beneficiary. The spouse, in this case, could leave the funds in the plan until the year the participant would have turned 70 1/2. Just assuming the document is written consistent to the regulations.

Good Luck!

[masteff]

IRS Pub 575 page 28: "Rollover by surviving spouse. You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You can roll over the distribution into a qualified retirement plan or a traditional or Roth IRA." (emphasis added)

As to the 5-year rule, yes, the rollover satisfies that but best to do it by year 4. See this thread for discussion about year 4 vs year 5: http://benefitslink.com/boards/index.php?s...47057&st=15

As to rolling it to her regular EE account in the same plan: I'm not aware of any problem. Her regular EE account is separate and distinct from her account as a beneficiary. But I'd welcome if anyone knows of any rule I'm missing on that one.

@ETK - thanks to a lively discussion two years ago, I can state that the spouse CAN elect the 5-year rule. http://benefitslink.com/boards/index.php?s...47057&st=15 However this would likely only be beneficial if a) the spouse was older than the EE and the EE was close to 70 1/2 or b) in the case of a poorly written document that excluded the spousal exception.

[QDROphile]

Imposing the five year distribution rule and not providing otherwise for a surviving spouse does not mean the document is poorly written. Plan design involves many policy choices, even in these days when so many cannot think beyond the prototype. Why should an employer provide a vehicle for retirement payments to a spouse or other beneficiary, especially when rollover to an IRA allows continuation of the deferral of income and flexibility in payment? I don't think there is a single answer.

[masteff]

Imposing the five year distribution rule and not providing otherwise for a surviving spouse does not mean the document is poorly written.

Touché! my large plan keep-all-the-money-in-the-plan-that-you-can background came out in my choice of words.

[QDROphile]

I agree that in a "keep all the money" environment, the five year rule would be the wrong choice. Providing a familiar home for widows and orphans is also a nice benefit.