Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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election to treat the IRA as her own occurs after she has rolled over the distribution into that IRA indicates that the IRA into which she rolled the distribution was an IRA in the decedent’s name. See PLR 9608042 for an example. As with rollovers into her own IRA, an inherited IRA into which the spouse rolls a distribution from the decedent’s plan can be either a pre-existing IRA (PLRs 9418034, 9842058, 2006-08029), or a new inherited IRA created for this purpose (PLRs 2004-50057, 2009-36049). 3.2.08 Rollover if spouse is under age 59½ A surviving spouse who is under age 59½ faces a dilemma. If she leaves the inherited benefits in the deceased participant’s plan, she can withdraw the benefits whenever she wishes penalty-free, because the 10 percent penalty on early distributions does not apply to death benefits. ¶ 9.4.01 . However, she may be forced to take annual RMDs as beneficiary (see ¶ 1.6.04 )), and if she dies while the benefits are still in the deceased participant’s account the distribution options after her death will usually be less favorable than the options available if she had rolled over the benefits to her own IRA; see ¶ 1.6.03 (E), ¶ 1.6.05 (C). Alternatively, the spouse could take the benefits out of the deceased participant’s account and roll them over to her own retirement plan, an action that will usually produce better distribution options for her beneficiaries upon her later death ( ¶ 3.2.01 (B)); but once the benefits are rolled to her own plan, they become “her” benefits, and the death benefit exception no longer applies. She will not be able to withdraw from the rollover account until she reaches age 59½, unless she pays the 10 percent penalty or qualifies for an exception ( ¶ 9.2 – ¶ 9.4 ). Here are strategies to deal with this dilemma. Note that strategies A, C, and D involve the spouse’s taking part of the benefits as beneficiary and rolling over the rest. Reg. § 1.408-8 , A-5(a), (see ¶ 3.2.03 (A)) allows the surviving spouse to treat her interest in an IRA inherited from the participant “or the remaining part of such interest if distribution thereof has commenced to the spouse” as the spouse’s own IRA. So, the spousal election can be made even after the spouse has taken one or more distributions as beneficiary. See PLRs 2001-10033, 2002-42044. A. Leave benefits in decedent’s plan until spouse reaches age 59½, then roll them over. While she is under age 59½, the spouse can withdraw funds as needed penalty-free under the death benefits exception. If her death prior to completing the rollover would produce undesirable tax results for her beneficiaries, she can buy life insurance to protect against that risk. If she will reach age 59½ before the end of the year in which the deceased participant would have reached age 70½, AND the decedent’s plan allows her to name her own successor beneficiaries, AND she does so, this option does not produce bad results EVEN IF the surviving spouse herself dies before she reaches age 59½: Her designated beneficiaries’ life expectancies would be the ADP. See ¶ 1.6.05 (C). B. Roll to spouse’s IRA, use SOSEPP if money later needed . The spouse could roll all of the inherited money over immediately to her own IRA, to stop or prevent having to take RMDs as beneficiary if applicable, and to assure that the best possible distribution options will be available to her beneficiaries regardless of when she dies. If she later needs funds from the rollover IRA while she is still under age 59½, she can use the “series of substantially equal periodic payments” exception (¶ 9.2) to avoid the 10 percent penalty.