Spouse Direct R/O to Inherited IRA
In case anyone was wondering the outcome of my conversations with the administrators of a client’s deceased spouse’s 401(k) and DB plan, here is the result. Client is 46 and wants an inherited IRA, not her own, for obvious reasons. The employer’s QRP attorney agreed, that if she opens a “shell” inherited IRA, the custodian can request the transfer of both the DB lump sum death benefit and the 401(k) account balance, and it will be transferred via a Direct Rollover. I have also talked to the custodian to be sure it will be an inherited IRA and not hers personally. This is the outcome we needed, and even though we have two different TPAs, they will abide with our request. He had two other plans with another employer, so we’ll use this one as precedent to encourage them to do the right thing, as well.
Permalink Submitted by Edward Czapor on Sun, 2008-01-06 17:29
Al,
I’m a little confused on this issue. Can we definitely expect a TCA or other IRS initiative to allow spousal direct rollovers to an inherited IRA? Have there been any favorable PLR’s? I believe we can all agree that it is the right thing to do. Excluding spouses was likely an oversight, but as it stands now it appears to be prohibited. See pg. 28 of Pub. 575 (2007) under Rollovers by nonspouse beneficiary. Employer plans have generally been more restrictive on distributions than allowed by the IRS, but can a plan be more liberal.
Ed C.
Permalink Submitted by Al Fry on Sun, 2008-01-06 18:40
There are two issues in this regard that need to be addressed, neither of which appeared in a TCA 2007 Bill that was passed on Dec. 19, signed into law a few days ago. (1) Making the non-spouse Direct Rollovers mandatory; and (2) having this provision apply to spouses, as well. Even the IRS (apparently) has flipped on their decision (in anticipation of TCA 2007) to make this (#(1)) mandatory for all QRPs 1-1-2008, although many plans have procedurally added this provision. I think there was another TCA that was not passed that may contain this provision, that may be addressed when Congress gets back. Number (2) above has been discussed with some members of Congress, who agreed it needed to be fixed, however I do not know whether it was too late to get it in the TCA that is yet to be passed. As to PLRs, apparently there is only one issued prior to PPA 2006, PLR 200450057, and none since. Some TPAs will allow this based on the PLR, some will not. I cannot imagine the IRS or ERISA challenging any Plan that allowed this, as no governmental unit would want to show they are not sympathetic to young widows.
Permalink Submitted by Edward Czapor on Sun, 2008-01-06 19:04
Also see Pub. 590 pg. 26 under Rollover by nonspouse beneficiary. Here it states that if you are the designated beneficiary and not the employee’s spouse that the IRA is treated as an inherited IRA. There is no mention of a spouse rolling over to an inherited IRA, but there also is nothing saying it can’t be done. What is specific is that a direct rollover by a nonspouse must be an inherited IRA and cannot be rolled over to the beneficiary’s own IRA. Perhaps this is the key to my original question.
Ed C.
Permalink Submitted by Edward Czapor on Sun, 2008-01-06 19:10
Al, thanks for your reply.
Ed C.
Permalink Submitted by Al Fry on Sun, 2008-01-06 20:35
Another example of a disparity which seems to advantage non-spouses over spouses is when they are the beneficiary of an annuitized NQ Annuity. If the annuitant dies during the certain period (or access period for hybrid annuitization), and there is remaining cost basis, the remaining payments are FIFO for non-spouses; and pro-rata for spouses. The surviving spouse has certain rights that non-spouses do not have, however. If the spouse wishes, he/she can always elect to take the DB as a non-spouse and get FIFO, giving up the additional rights.