Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

J. Beneficiary’s RMDs after the transfer. In Notice 2007-7, A-19, the IRS decreed that the minimum distribution rules applicable to the “inherited IRA” which received the direct rollover would generally be the same as the rule that applied to the benefit while it was still in the original plan. So if the original plan decreed that the 5-year rule would apply to all death benefits of participants who died before the RBD (see ¶ 1.5.07 (A), #2), the same 5- year rule would automatically apply to the inherited IRA into which the benefits were transferred via nonspouse beneficiary rollover. Since this rule in Notice 2007-7 would basically defeat the entire Congressional purpose in allowing nonspouse beneficiary rollovers, the IRS does allow one escape hatch: IF the rollover is completed by a certain deadline, then the benefits can be distributed from the inherited IRA using the life-expectancy-of-the-beneficiary as the Applicable Distribution Period ( ¶ 1.2.03 ). If the participant died in 2008, the deadline is December 31, 2010. See ¶ 1.1.04 and Notice 2009-82 , 2009-41 IRB 491, Part V, A-3. If the participant died in any other year, the deadline is December 31 of the year after the year in which the participant died. Notice 2007-7, A-17(c)(2) (“Special Rule”). 4.2.05 Nonspouse beneficiary Roth conversions This ¶ 4.2.05 explains how certain beneficiaries can convert certain inherited traditional retirement plans to inherited Roth IRAs by means of the “nonspouse beneficiary rollover” described at ¶ 4.2.04 . For how to advise a beneficiary who has inherited a Roth IRA ( i.e., an IRA that is ALREADY a Roth at the time of the participant’s death), see the following instead of this section: ¶ 5.2.05 (B), “Computing Five-Year Period for beneficiaries”; ¶ 5.2.06 , “Jules and Jim Example”; and ¶ 4.1.02 . A. Nonspouse beneficiary cannot convert an inherited IRA. The participant’s surviving spouse can convert a traditional IRA she has inherited from the participant to an inherited (or to her own) Roth IRA; see ¶ 3.2.04 . No other beneficiary (regardless of whether such beneficiary is an individual, a trust, or an estate) can convert an inherited IRA to a Roth IRA. § 408A(c)(6)(A) provides that “No rollover contribution may be made to a Roth IRA unless it is a qualified rollover contribution.” “Qualified rollover contribution” is defined in § 408A(e) . It includes a rollover from an individual account plan ( i.e., an IRA), but only if such rollover meets the requirements of § 408(d)(3) . One requirement of § 408(d)(3) is that no rollover may be made from an inherited IRA. An “inherited IRA” for this purpose means an IRA acquired by an individual by reason of the death of another individual who was not the acquirer’s spouse (see ¶ 4.2.01 ). § 408(d)(3)(C) . Thus, nonspouse beneficiaries have never been, and are not now, able to “roll” money from an inherited IRA to a Roth IRA. PLR 2000-13041. If the funds are transferred from an inherited traditional IRA to an inherited Roth IRA, that would be a “failed” Roth conversion ( ¶ 5.4.06 ) and would be treated as a taxable distribution to the beneficiary from the inherited IRA followed by a regular (excess) contribution to the inherited Roth IRA. Reg. § 1.408A-8(b)(4) , § 1.408A-4 , A-1(a), A-3(b). IRA-to-IRA transfers can be used to avoid a number of the restrictions that apply to rollovers; see ¶ 2.6.08 . However, an IRA-to-IRA transfer can not be used to avoid this restriction