60 Month Installment Rollover to Inherited IRA from Pension?

Submitted by John Boardman on Tue, 2015-01-06 19:13

I have a client who is the beneficiary of his mother’s pension (state of KY government employee). She passed away pre-retirement, pre-70 1/2. His bene options are unique. Actuarial refund of 119k, lump refund of 78k, or 3 pension options (60 month, 120 month, life). The 60 month payment is $7200 per month for a total of $432,000 – much higher than lumps. In the documentation it explicitly says and after having a conference call with him and state of KY retirement, we confirmed that they will do a “rollover” to an inherited IRA for him on either lump option OR the 60 month benefit. Obviously that is intriguing with a total 4-5X the listed lump amounts. My questions are:

1) They call it a rollover to an inherited IRA and report as code G, is this correct?
2) Can an inherited IRA (non spousal) receive funds via 60 monthly installments?
3) How would RMDs be calculated for him as money is moving over from a pension stream?
4) Dont think so but any violation to one rollover per year rule?

Any help on this would be greatly appreciated!



Submitted by Alan - IRA critic on Tue, 2015-01-06 20:39

  1.  Yes
  2.  Yes, but only after the applicable RMD for the year is satisfied. It needs to be determined if the govt plan default is the 5 year rule or life expectancy OR perhaps beneficiary election. If the 5 year rule applies, the inherited IRA RMDs can only use life expectancy for the funds received by 12/31 of the year following the year of mother’s death. Not a completing a lump sum rollover could have consequences. That brings up the question of the huge calculation discrepancy, which should be re checked to make sure it is correct. If correct, the large difference makes the 5 year rollout worthwhile even if there are RMD repercussions. Also note that the administration is proposing a mandatory 5 year rule for non spouse beneficiaries anyway.
  3. This is the key question. The plan should be questioned about the 5 year vs life expectancy options. Perhaps it is 5 years as that would allow each installment to be rolled over. Under life expectancy, a portion of each annual distribution would be an RMD.
  4. One rollover rule does not apply to qualified plan distributions, only to IRA to IRA rollovers.


Submitted by John Boardman on Tue, 2015-01-06 22:34

My fear is that the people working with pensions at KY wont knwo the answer.   My call with them this morning was not confidence insipring in their ability to know these answers correctly.   One question: How or why woudl he take an RMD prior to it coming over?  Are you thinking the RMD woudl apply only to what was retained? 



Submitted by John Boardman on Fri, 2015-01-09 14:54

1) Why would an RMD have to come from the pension prior to the 60 installments beginning?2) If thats the case, on what value would it be calculated?  



Submitted by Alan - IRA critic on Fri, 2015-01-09 17:03

  • This situation is probably addressed in Q 17 on p 6 of Notice 2007-7:  http://www.irs.gov/pub/irs-drop/n-07-07.pdf. It is pretty complex with several possible scenarios.
  • I suspect that the 5 year rollout option also invokes the 5 year rule with respect to this plan. As such, there are no annual RMDs from the plan and the 20% annual distributions can be directly rolled over until the 5th year of the 5 year period. Starting in the 5th year any distribution is not eligible for rollover.
  • This also raises question regarding the IRA RMDs. As the Notice indicates, direct rollovers completed before the end of the year following the year of death are eligible for life expectancy RMDs from the inherited IRA. Rollovers after that date are subject to the same RMD rule as the pension plan, ie the 5 year rule. That means by the end of the same 5 year period, the rollovers in years 2-4 must be distributed from the IRA. To get the maximum stretch, it appears that direct rollovers completed by the end of year 1 should be made to a new inherited IRA from which life expectancy RMDs can be taken and direct rollovers after that should go to another new inherited IRA which will be subject to the same 5 year rule as the pension plan. This second inherited IRA would have to be fully distributed by the end of the 5 year period. The amounts going to each inherited IRA would depend on when the distributions begin from the pension plan. If might be possible that two installments can be distributed before the end of the first year following the year of death, and these could receive life expectancy RMDs.


Submitted by John Boardman on Tue, 2015-01-13 13:57

So, should I just call the pension group and ask them if the RMD default is 5 year or lifetime?  If they say 5 year, your above response is correct.  But, if they state lifetime RMDs are default to the plan, can he just rollover via 60 monthly payments and take lifetime RMDs based on previous year end balance to get maximum stretch on all assets?   



Submitted by Alan - IRA critic on Tue, 2015-01-13 18:47

Yes, I would contact them for clarification, since they have an obligation to define the portion of any distribution that is an RMD, and therefore would be eligible for rollover. Even if they indicate the 5 year rule applies, they need to know that any payment made in the 5th year is not rollover eligible. If LE is indicated, then a small portion of each installment would be an RMD and the rest could be rolled over. If each installment is completely rolled over, excess contributions to the IRA are being created.



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