Inherited IRA Situation – any feedback would be appreciated
The situation unfolds when Rosanne’s ex-husband (Mike) passed away. Mike had a qualified plan at his former employer Mass Mutual that still had Rosanne listed as the primary beneficiary. Since Rosanne is now a non-spouse since they were divorced, she proceeded with an inherited IRA rollover request. After contacting Mass Mutual, where Mike’s plan was held, she asked them for the appropriate paperwork to complete an inherited IRA rollover. The form arrived with a menu of options that Rosanne has to choose from (form was dated 2001). Of those options were:
1. One-sum Cash Payment of the deceased entire account balance
2. One-sum Cash payment partial amount
3. Installment payments of the account balance
4. Have total account balance purchase an annuity
5. Leave account with Mass Mutual and receive one lump sum by
December 31st of that year or the 5 year rule
6 .Spousal IRA rollover
The spousal IRA rollover was not available due to the divorce.
Of the above options, a trustee to trustee transfer was NOT one of them. So, as Rosanne completed the form, she chose option 1. As a non-spouse, Rosanne did not have the option to make a direct rollover to into her established inherited IRA. Rosanne elected to not withhold tax, and she received a check from Mass Mutual made payable to her. She immediately turned around and deposited that check into an established inherited IRA held with Pershing.
Subsequently, Rosanne received a 1099 from Mass Mutual making the entire distribution taxable to her surprise.
Question: In your opinion, is the distribution fully taxable?
If yes, given the following facts, what are Rosanne’s alternative options? Private letter ruling?
The caveat is that Mass Mutual sent Rosanne a form that was created in 2001, so hence the 2006 tax laws were not in effect yet in 2001, and their systems had not yet been updated. Rosanne’s form was dated 4/7/2007, so Mass Mutual had not updated their forms to correlate with new tax laws. Rosanne spoke with Mass Mutual again a week ago alerting them to the situation and they recognized their outdated form, but hasn’t done anything about it.
Any feedback would be appreciated.
Permalink Submitted by Alan Spross on Fri, 2008-03-21 00:21
Short answer, “Yes, it’s taxable.
While there has been some mixed signals from the IRS, Notice 2007-7 still applies, ie. the non spouse rollover is optional for the qualified plan. If the plan had adopted the non spouse rollover provision of the PPA, there might be some legal recourse against the plan for not disclosing the proper options to the beneficiary.
As for the IRS, there has never been any rollover relief for distributions that were not rollover eligible in the first place, such as in this case. The IRS will therefore consider this a full taxable distribution.
She certainly selected the worst possible option regardless of confusion surrounding certain PPA provisions. Not to further complicate the matter, but I assume her ex did not remarry or there could be further problems for her. A marriage lasting a certain period of time results in the new spouse being considered the actual beneficiary under federal law. For that reason, it is best for the divorced spouse to secure a QDRO to protect their interest in plan assets.
The deposit into the Pershing IRA makes me wonder what Pershing was told with respect to the marital status. If the existing IRA was inherited, who was the decedent? Inherited IRAs cannot have multiple decedents. An excess contribution to this IRA exists which must be corrected before 6% excise taxes start to accumulate in addition to the taxable income.
If I am misinterpreting some facts here, please advise.