Help with QRP, Inherited IRA, MRD, and PPA
This is a somewhat complex situation.
A couple years ago (mid 2005) my father passed away and left his profit sharing account to my siblings and myself.
The plan required for us, as non-spousal beneficiaries, to take either a lump sum distribution or distribute it over five years.
We elected to wait on any distributions, because of the pending passage of the PPA in the hopes that it would become possible to rollover the profit sharing account into an inherited IRA. After the PPA passed, we were told that rolling into an inherited IRA *would* be possible, but only after the plan administrator (Benetech) redrafted the plan’s documents.
An addendum to the plan was completed a couple months ago. However my attorney, after doing some research, concluded that because we did not take a MRD in 2006 that, while we could rollover into a traditional IRA, we were still bound by the 5-year distribution rule.
It seems to me that:
1) Once in the inherited IRA, we should be bound by the rules governing inherited IRAs
or at least:
2) We could claim that we simply “missed” the withdrawal in 2006, pay the associated penalty, and then continue on in the inherited IRA with lifetime MRDs.
I’d appreciate any suggestions or insights.
Thanks!
Permalink Submitted by Alan Spross on Wed, 2007-08-08 22:13
Unfortuneately, you are another victim of IRS Notice 2007-7 as the “special rule” was interpreted. Under that notice, non spouse beneficiaries of QRPs under the 5 year rule that thought they were getting relief under the PPA were let down to say the least. For more, you could google Notice 2007-7.
Your attorney is close, but even taking the 06 RMD from the plan would not have cleared the way for you to use life expectancy from the IRA transfer. The Notice says that the transfer had to be made no later than the end of the year following death to get lifetime RMDs, and since the transfer was not available until 2007, you never could have completed the IRA transfer by 12/06.
There may be a slim chance of relief from Congress on this, as Reps have probably been receiving irate letters from constituents. But I think you are in situation where you must gamble on making the right guess:
1) Hope there will be relief, and therefore take 06 and 07 RMDs from the IRA this year, 08 next year etc. If the relief comes through, you will be on schedule. But if not, you will face a big distribution in 09 or 2010 when the 5 year period expires.
2) Assume no relief, and to keep your tax bracket under control, just take equal amounts out for 07-2010 to avoid the big distribution at the end.
You could also start with 1) above, but give up and switch to 2) late in 2008 if no news on relief.
Permalink Submitted by [email protected] on Thu, 2007-08-09 15:06
There is a TCA on PPA 2006, but unfortunately, this problem was not addressed!
Permalink Submitted by Jason C on Tue, 2007-08-14 18:06
Hello.
I am in the exact same situation, although my father had passed away (as well as my mother) a couple of years earlier than the threads author here.
I was under the impression that if this new act was passed (it was introduced earlier this month to be taken up beginning Sept 3rd after they return from vacation) that this would help our situation?
I thought that if they fix the “may offer rollover” to “must offer rollover” in the original act’s text, that it would void not only the plan administrator not *having* to permit it, but would also void out the requirement to have to do anything under a 5 year plan, and you would just have to make sure you go back and pay all previous year’s RMD’s, no?
I thought this PPA-TCA would allow you to pretty much break free of any and all original plan requirements after the trustee-to-trustee transfer/rollover was completed (and it would HAVE to be permitted after TCA)?
Permalink Submitted by Alan Spross on Tue, 2007-08-14 21:31
I wish I could be more positive, but I do not see the proposed mandatory transfer affecting Notice 2007-7 and the “special rule”. While the transfer could not be refused, the RMD requirements would not be affected any more than they are with any other transfer or rollover.
Before 2007-7, my best guess was in accord with others, that there would be a grandfathered date to complete the transfer to take advantage of the RMD stretch, just as there was when the 2002 RMD requirements were issued changing the default from the 5 year rule to life expectancy. In that case, the date of 12/31/03 was stipulated as a final date in which life expectancy election could be made by taking the required life expectancy RMDs back to the year following death. Notice 2007-7 therefore took most people by surprise, including probably the Congressional committee members who drafted the PPA.
In summary, the transfer offer will probably be mandatory, but that would not change the RMD requirement under the transferred account because of 2007-7. The inherited IRA for pre 2006 deaths has to follow the RMD provisions that were contained in the employer plan, most of which likely contemplated the 5 year rule or worse for deaths prior to the RBD.