Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

2007-7, Section V, the IRS addressed the RMD effects and other details of nonspouse beneficiary rollovers. Notice 2007-7 was further clarified in a special edition of the IRS’s Employee Plan News ( http://www.irs.gov/pub/irs-tege/se_021307.pdf ). Beginning in 2010, plans are required to offer the direct rollover to a Designated Beneficiary. See § 402(f)(2)(A) as amended by WRERA; ¶ 2.6.01 (C); and “E” below. B. Types of nonIRA plans. § 402(c)(11) applies to 403(b) plans and governmental 457(b) plans ( ¶ 5.4.01 (B), #3) as well as to qualified retirement plans (QRPs). § 403(b)(8) , § 457(e)(16)(B) . For ease of reference this section will speak mostly of QRPs, but all statements apply equally to 403(b) and governmental 457(b) plans. C. Available only to a Designated Beneficiary. The direct rollover to an inherited IRA is available only for an “individual who is a designated beneficiary.” § 402(c)(11)(A) . A Designated Beneficiary means an individual (or group of individuals) who are named as beneficiary(ies) of the plan by the participant or under the terms of the plan. See ¶ 1.7.03 . Though a trust is not an individual, “a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a designated beneficiary” for purposes of the nonspouse beneficiary rollover provision, to the extent provided in rules prescribed by the Treasury. § 402(c)(11)(B) . The IRS has confirmed that Reg. § 1.401(a)(9)-4 , A-5 (see ¶ 6.2.03 ) will apply for purposes of determining whether a trust named as beneficiary is eligible to use the nonspouse beneficiary rollover under § 402(c)(11) . Notice 2007-7, A-16. Since the option to transfer inherited plan benefits to an inherited IRA is limited to Designated Beneficiaries, an estate or non-see-through trust will not be able to use the nonspouse beneficiary rollover to achieve any type of gradual payout from a plan that permits only a lump sum distribution; the estate or such a trust will be stuck with whatever payout options the plan allows. The estate or trust can not compel the plan to pay distributions out to the estate or trust over five years ( ¶ 1.5.06 ) or over what would have been the decedent’s life expectancy ( ¶ 1.5.08 ), even though the minimum distribution rules would have permitted such a payout; see ¶ 1.5.10 . D. Direct rollovers only. Only direct rollovers ( ¶ 2.6.01 (C)) to an inherited IRA are permitted. § 402(c)(11)(A) . If the plan distributes funds to the nonspouse beneficiary instead of to the inherited IRA, then the distribution is taxable and rollover of the distributed amount becomes impossible. See ¶ 4.2.02 (A). However, if the beneficiary takes a partial distribution, he can still have a direct rollover of the rest of the benefits—the part he did NOT take out of the plan—to an inherited IRA. E. Must roll to an “inherited IRA.” The nonspouse beneficiary direct rollover may be made only to an “inherited IRA” ( i.e., one titled as described at ¶ 4.2.01 ) which is “established for the purpose” of receiving this distribution. § 402(c)(11)(A) ; Notice 2007-7, A-13. Regarding whether such accounts can later be combined with other IRAs inherited from the same decedent, see ¶ 4.2.03 . A nonspouse beneficiary can never “roll” an inherited plan to the beneficiary’s own IRA or Roth IRA, only to an inherited IRA or Roth IRA. If a nonspouse beneficiary rolls a distribution from an inherited plan into the beneficiary’s own traditional or Roth IRA, the rollover would be treated as, first, a taxable distribution from the inherited plan (because it is a plan distribution that