RMD Confirmation
Hello,
I have a new client w/ the following fact pattern:
1. Was one of 4 designated beneficiaries to inherit both a (1) Rollover (Trad.) IRA, as well as a (2) Profit Sharing Plan from his cousin.
2. Cousin passed away last year (June, 2021) and 2 new Inherited retirement accounts (1 for the IRA; 1 for the PSP) were established at the custodian where the cousin maintained the Accts.
3. Client’s DOB is 03/27/1950 (so was 71 years of age when the cousin passed) and is < 10 years younger than the cousin who passed away (either same age; a couple of years older or couple of years younger).
Accordingly, I want to confirm the following:
A. Under The Secure Act, since my new client is <10 years younger than the cousin, HE may still stretch as an eligible designated beneficiary.
B. New client would use his age this year (72) w/ the new single life expectancy table (17.2 years), w/ the 12/31/21 Acct. balance in each inherited acct., to determine each respective RMD for 2022.
C. For the profit sharing plan, confirming that the new client may opt to convert part, or all, of this Acct. into an Inherited ROTH IRA – since the PSP is a qualified employer retirement plan (even though new client’s share of the PSP was already transferred into an Inherited pre-tax acct. for him). How long would the client have to effectuate such a partial (or full) conversion – assuming still possible despite the funds being transferred from the cousin’s PSP into the client’s new Inherited PSP (receiving 1/4 of it as there were 4 designated beneficiaries).
D. Assume client names his spouse (Wife) as primary beneficiary of these 2 new Inherited retirement accounts. At client’s demise, even though the Wife is an EDB (as a spouse), since this represents an Inherited Acct. for my client (Husband), I want to confirm if the Wife (as primary beneficiary of the Inh. retirement accts.) would be considered an EDB OR Non-EDB. Would the Wife also be able to roll-over either Inh. retirement acct. into her own IRA?
Anything else as well of significance? Appreciate your assistance.
Jason
Permalink Submitted by David Mertz on Thu, 2022-03-03 13:38
A. Correct, the client is an EDB because the client is not more than 10 years younger than the decedent.
B. Correct.
C. If the inherited PSP has been directly rolled over to an inherited traditional IRA, there is no option to convert to an inherited Roth IRA even though the inherited traditional IRA was funded by rollover from an employer plan. Getting the money into an inherited Roth IRA requires a direct rollover from the inherited employer plan directly to the inherited Roth IRA.
D. [Disregard this, see follow-up below] A surviving spouse beneficiary is always an EDB and can at any time assume ownership of some or all of the IRA inherited from the deceased spouse. This is best done by retitling or by trustee-to-trustee transfer since a distribution from the inherited IRA and rollover to their own IRA exposes the surviving spouse to the one-rollover-per-12-months limitation.
Permalink Submitted by Jason Hochstadt on Thu, 2022-03-03 14:18
Hi DMx, Thanks!The prior custodian erred in ‘C’ because they never reviewed doing a partial conversion of the inherited PSP into a Roth Conv. IRA.It’s my understanding the Inh. PSP is titled, “Qualified Plan FBO my client’s name….” Included the decedent’s name.Question, however: With an Inherited PSP, I assume the titling must remain as a ‘Qualified Plan’, as opposed to an ‘Inherited IRA’ – even though my new client was obviously never a participant in their deceased cousin’s qualified plan.Thanks. Jason
Permalink Submitted by Jason Hochstadt on Thu, 2022-03-03 14:20
I say that because the inherited Qualified Plan is not titled as an Inherited IRA – it’s titled as a ‘Qualified Plan FBO client’s name B/O decedent.
Permalink Submitted by David Mertz on Thu, 2022-03-03 16:43
If the plan provides a designated Roth account, even if it’s otherwise permissible, it’s up to the plan as to whether they permit an In-plan Roth Rollover from an inherited account. Even if they don’t, a direct rollover from an inherited non-IRA qualified plan to an inherited Roth IRA is permissible. Either rollover would be taxable.
Permalink Submitted by Jason Hochstadt on Thu, 2022-03-03 17:55
Hi DMx, Just reconfirming that the client may NOT roll the Inherited Qualified Plan Acct. (pre-tax) into the Inherited Trad. (Rollover) IRA. THanks.
Permalink Submitted by David Mertz on Thu, 2022-03-03 19:35
An inherited qualified plan such as the PSP is permitted to be directly rolled over to an inherited traditional IRA, but once in the inherited traditional IRA it is not permitted to be converted to an inherited Roth IRA. A direct rollover is one where the plan pays the distribution directly to the receiving inherited IRA, not one paid to the individual which the individual then deposits within 60 days as a rollover (which would be an impermissible indirect rollover).
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 19:55
Re Q. D, a spouse is an EDB only if they are the surviving spouse of the “employee” per the Secure Act. Since client’s wife is a successor beneficiary of client’s interest as a EDB, wife is not an EDB and could not do a spousal rollover.
Permalink Submitted by David Mertz on Thu, 2022-03-03 20:11
Thanks, I misread question D, thinking it was an alternate scenario where the decedent’s wife, not the client was the beneficiary. Alan is right, a successor beneficiary is never an EDB and cannot do a spousal rollover. Please disregard my original reply to D.
Permalink Submitted by Jason Hochstadt on Thu, 2022-03-03 20:39
Hi DMx and Alan, Thank you!1. Just to confirm DMX’s response at 14:35PM, may a non-spouse beneficiary of an Inherited Qualified Plan, which has been transferred into an Inherited Qualified Plan Acct. title for the non-spouse beneficiary, transfer this (directly) into an Inherited IRA? 2. If so, can this be commingled w/ the Inherited IRA resulting from the deceased’s Traditional IRA, OR must a separate Inherited IRA always be maintained for the Qualified Plan which had been inherited?Thank you! Jason
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 22:11
Yes, while qualified plans typically provide separate accounting rather than actual separate accounts for beneficiaries, a separate account balance for a designated beneficiary is direct rollover eligible to an inherited IRA or inherited Roth IRA.
If the inherited IRA was inherited from the same decedent as the inherited QRP, and the RMD divisor is the same, the balances could be combined into a single inherited IRA account initially or by direct transfer after first creating separate inherited IRAs. The IRS has not specified the result of combining two inherited accounts with different divisors, but the expected result is that the faster distribution period would apply to the combined account.
Permalink Submitted by Jason Hochstadt on Thu, 2022-03-03 23:38
Hi Alan & DMX, Thank you! In terms of 1 & 2, the answer is yes – same decedent for Inh. IRA & Inh. QP, same RMD divisor. So, absent doing a partial Roth IRA conversion from the Inh. QP (A below), we may just establish 1 Inh. Trad. IRA at the custodian we work with, and have both Inherited ret. accts. transferred into this. If incorrect, please advise.A. If the client wishes to partially convert the Inherited Qualified Plan (PSP) into a Roth IRA, is there a time limit for doing so? So, we can establish an Inherited Roth IRA at the custodian we use, and have whatever portion of the Inherited Qual. Plan that the client wishes to convert be directed, on a trustee-to-trustee basis, directly into this Inherited Roth IRA, w/ the balance into the Inherited Trad. IRA. B. Also, in the event the decedent never took her RMDs before death last year (was of RMD age) from either her Trad. IRA or PSP, and no RMDs were taken by the beneficiaries (there were multiple ones, including my new client), aside from submitting Form 5329 and taking out my client’s share (pro-rata) of the decedent’s RMD from each Acct., I assume this would be taxed in 2022 to my client, despite the RMD being for the decedent in 2021, due to my client being a cash basis taxpayer.Thanks again! Jason