IRA Funding & Beneficiares
Father & Mother have been divorced for about 3 years. A QDRO has been calculated, but there has not been an agreement between the parties of the amount that Mom needs to give to her ex. He is taking additional 401K funds and relinquiishing any claim against her pension funds. They have been getting closer, but no paperwork has been signed.
New circumstances have arisen. Father has just found out that he has only a short time to live. They have now agreed on the amount and the paperwork will be signed tomorrow.
Father wants to open an IRA and name his 2 sons as beneficiary so they can take advantage of the IRA “stretch”. However, it could be 30 days or more before that paper work makes it through the legal process and the funds are transferred to the father’s IRA account. It is possible that he will not live that long.
Can an IRA account be opened with named beneficiaries and be funded later? If so, how much later? If the account is not funded until after his death, would the sons still be considered designated beneficiaresWould funds from ex-wifes 401K, directly transferred to his IRA, but after his death, still be able to use the IRA stretch.?
Would funds from ex-wifes 401K, directly transferred to his IRA, but after his death, still be able to use the IRA stretch.
Would it be better to fund it right away with some taxable dollars even though this would create a basis and more complex reporting issues?
Permalink Submitted by Alan Spross on Mon, 2012-08-20 18:54
There are differing issues here depending on the status of the QDRO at the time of father’s death.
1) If father passes before the QDRO is accepted, is is very possible that no part of the benefit would go to his beneficiaries. If the plan allows the QDRO to include contingent beneficiaries, there is considerable debate whether the contingent beneficiaries must themselves qualify as an alternate payee. If these chidren are not the children of the participant, the plan may not accept them as contingent beneficiaries since they would not qualify as alternate payees.
2) If father is alive when the QDRO is accepted he may be able to name successor beneficiaries of his interest, but this again depends on the plan provisions. His attorneys need to determine what the plan will allow so time is not lost in having to change the QDRO draft. They need to determine if he can name successor beneficiaries in the QDRO terms to further save time.
3) If the plan will allow successor beneficiaries to be named by father, then there is no problem if he passes before funds are transferred to his IRA. His children would be designated beneficiaries for his interest in the plan. They could then have their interests transferred to an inherited IRA. The inherited IRA could be set up in advance so no time is lost in completing the transfer. If the plan will not allow successor beneficiaries to be named, then father may need to be alive up to the date the transfer is made to his IRA. IRA custodian should be asked now if they will accept direct rollover to fathers own IRA if father is not alive when it is received and if he should set up an inherited IRA in advance just in case. Of course, both IRAs would have to include correct beneficiaries. There is no benefit in funding his IRA with excess contributions, it would just create additional problems.
Note that a QDRO cannot force a plan to allow distributions when the plan would not otherwise allow them. Even if father is alive beyond the QDRO acceptance, he may not be able to transfer the funds to his IRA at the present time.
Permalink Submitted by Deena Wagner on Tue, 2012-08-21 03:31
Thank you for the prompt reply. The custodian of the IRA will allow beneficiaries to be named now and will accept direct rollover. It is expected that papers will be signed today accepting the QDRO. I will need to find out if the plan will allow successor beneficiaries to be named.
One other question, please. You stated, “If father passes before the QDRO is accepted, is is very possible that no part of the benefit would go to his beneficiaries”. What would happen to the monies in this case? Would they just stay in the ex-wife’s 401K plan?
Permalink Submitted by Alan Spross on Tue, 2012-08-21 04:00
Yes. A QDRO is for the benefit of qualified alternate payees, and children of an ex spouse that are not those of the participant are not qualified alternate payees. Therefore, if he passed before the QDRO was accepted by the plan, barring a claim of negligence against the plan for unnecessary delay, the QDRO would be void and the ex would retain all the funds.
The suggestion regarding successor beneficiaries for the QDRO is to cover the beneficiary interests after the QDRO is accepted for the benefit of a qualified alternate payee (father) but before the proceeds can be transferred to his IRA. Without that, if he passed the plan would have a default beneficiary, most likely his estate and that would restrict the stretch for the beneficiaries.
Permalink Submitted by Deena Wagner on Tue, 2012-08-21 13:58
thank you