RMD Scenerio involving QP to IRA rollover
Hello:
Can someone provide an opinion/reference on the following:
Client age 70 and 5 months (June) passes in August and has Qualified Plan balance. Spouse (age 67) will be assuming and rolling over to her IRA. QP plan says the RMD needs come out prior to rollver. Correct?
I realize, if this was all IRA it is a clear “NO”, due to not reaching RBD. But here is the QP involved in the process.
Thanks,
pko
Permalink Submitted by Alan Spross on Fri, 2011-09-09 02:57
pko,
Plan is incorrect. All are probably in agreement that employee passed prior to RBD. While the employee could not have done a rollover without the RMD being withheld if he lived, the RMD Regs are different for beneficiaries. 401a(9)B applies instead of 401a(9)A. The surviving spouse need not take an RMD this year with or without a rollover. Since this year is not an RMD distribution year for the surviving spouse, she can do the rollover without any RMD distribution from the plan.
See following copy of IRS Reg:
1.401(a)(9)–3
Q–3. When are distributions required
to commence in order to satisfy the life
expectancy rule in section
401(a)(9)(B)(iii) and (iv)?
A–3. (a) Nonspouse beneficiary. In
order to satisfy the life expectancy rule
in section 401(a)(9)(B)(iii), if the designated
beneficiary is not the employee’s
surviving spouse, distributions
must commence on or before the end of
the calendar year immediately following
the calendar year in which the
employee died. This rule also applies to
the distribution of the entire remaining
benefit if another individual is a
designated beneficiary in addition to
the employee’s surviving spouse. See
A–2 and A–3 of § 1.401(a)(9)–8, however,
if the employee’s benefit is divided into
separate accounts.
(b) Spousal beneficiary. In order to
satisfy the rule in section
401(a)(9)(B)(iii) and (iv), if the sole designated
beneficiary is the employee’s
surviving spouse, distributions must
commence on or before the later of—
(1) The end of the calendar year immediately
following the calendar year
in which the employee died; and
(2) The end of the calendar year in
which the employee would have attained
age 701⁄2.
>>>>>>>>>>>>>>>>>
Permalink Submitted by Anonymous (not verified) on Fri, 2011-09-09 03:14
Thanks alan.
I thought so too.
The link below does not load for me. What is it? I should probably as check for a reference in the Final Regulations. I am sure they must cover this scenario.
pko
Permalink Submitted by Alan Spross on Fri, 2011-09-09 03:26
Tax Almanac appears to have just limited consumer use of their site, as I noticed that the link did not work. So I finally posted a copy from the IRS site itself. I assume you can see this copy?
Permalink Submitted by Lee Martinson on Mon, 2011-10-17 22:06
Hi, sorry to be so tardy on this, but can I clarify one thing?
Alan said: “While the employee could not have done a rollover without the RMD being withheld if he lived, the RMD Regs are different for beneficiaries. ”
My understanding is that if while living he tried to make a transfer, the RMD would have to have been taken or would have been taken by default if the transfer happened. However, after making a transfer while living, if he subsequently dies a few months later in the year, (being before his RBD) the beneficiary can’t have that RMD retroactively not count. The horse was already out of the barn so to speak and there is no putting it back.
On the other hand, in this situation posted by PKO, since no transfer had yet happened this year, and he died before his RBD, the RMD does not count, and does not need to be taken before rolling over any monies–that is the difference, correct?
Thanks,
Lee
Permalink Submitted by Alan Spross on Mon, 2011-10-17 23:09
Yes, that is the difference.
If employee is still working and the plan permits distributions eg after age 59.5, then a rollover can be done without an RMD. Another unique situation with some plans is that they require RMDs for everyone at 70.5. In that case the plan will require the “plan RMD” to be distributed. The employee can then take that plan RMD and roll it over to an IRA because it is only a plan RMD and not a statutory RMD. It resulted from the plan adopting RMD rules more restrictive than the IRS, and in that situation the employee can roll that “plan RMD” over to an IRA.
But if employee dies after receiving a statutory RMD, it cannot be reversed or rolled over because it was an RMD at the time it was distributed (good analogy on your part re horse leaving the barn). If it was just a plan RMD, a surviving spouse beneficiary might be able to roll it over if there was documented intent by the decedent being in process of doing a rollover, and this would take a PLR. The cost of the PLR would not be worth it unless the RMD was an unusually large sum.
Further, if the employee passes during the distribution year, his final return might produce a lower tax bracket due to partial year income. The tax rate might then be lower for the RMD than the beneficiary’s expected marginal rates in certain cases.