Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

“D” explains the tax treatment of a QRP distribution that is paid outright to the participant then partly rolled over by the participant, within 60 days, to one or more IRA(s).

“E” explains the effect of having a distribution sent, via direct rollover, entirely into multiple traditional IRAs or multiple Roth IRAs.

“F” explains how this section applies to beneficiaries who have inherited QRPs.

“G” discusses the effective date of Notice 2014-54 and the options for participants who took QRP distributions between 9/28/09 (issuance of Notice 2009-68) and the effective date of Notice 2014-54. This book does not cover direct rollovers from one QRP to another. See instead Notice 2014-54, Part V, Examples 2 and 3. The rules discussed in this ¶ 2.2.05 also apply to distributions and rollovers from 403(b) plan accounts and governmental 457(b) plan accounts that contain after-tax money. Notice 2014-54, “Purpose,” “Background.”

However, these rules do not apply to:

 Partial rollovers and split distributions from a Designated Roth Account (DRAC). See ¶ 5.7.06 instead.

 Distributions that are in the form of annuities. If the participant’s plan account has been “annuitized,” that is, converted from an individual account plan (also called a defined contribution plan) into a true annuity (stream of fixed payments for the life or lives of one or more individual(s) or for a term of years), different rules apply (not covered in this book). Notice 2014-54, “Background,” first two paragraphs.

B. Part direct rollover to Roth IRA, part direct rollover to traditional IRA.

If the participant instructs the plan administrator to transmit part of his distribution to a Roth IRA and part to a traditional IRA, the participant should also instruct the plan administrator which IRA should receive the after-tax money. The participant should tell the plan administrator to transfer the after-tax money to a Roth IRA. The pretax money should be directed to a traditional IRA (assuming the participant wants to continue deferring tax on it). This enables a participant who is retiring (or for some other reason receiving a distribution from a QRP) to do a “tax-free Roth conversion” of the after-tax money in his QRP account, while continuing to defer tax on the pretax money in his account. See Notice 2014-54, Part V, Example 4. This option to “separate the cream from the coffee” when taking a QRP (or 403(b), or governmental 457) distribution that includes after-tax money, by doing a tax-free Roth conversion of just the after-tax money, is an extremely valuable option. Every QRP participant who is receiving a distribution that includes after-tax money should use this approach, blessed by the IRS in Notice 2014-54, in order to achieve a tax-free Roth