Beneficiary IRA Created After Death
My client is 49. His wife died in April 2006 with $1.5M is a company plan including $500K NUA stock with a basis of $100k.
He wants to take advantage of the NUA, take penalty free another $150-$200k of distributions in 2007 and roll balance into an Inherited IRA.
How is this done in practice. The plan sponsor and several custodians I have contacted have stated that per PPA 2006 that only nonspouse beneficiaries can do this. I’ve read that PLR 2004-50057 states differently.
Has anyone created an post-death beneficiary ira, and if so, how.
Secondly, if the above won’t work, my client doesn’t need distrbutions after this year so he really doesn’t want to set-up a SOSEPP under 72(t). Could the lump sum distribution for NUA purposes be done in three transaction? 1. Roll NUA stock to taxable account 2. Take $200k distribution from plan 3. Roll remainder of plan into a Spousal IRA
Thanks
Steve
Permalink Submitted by Alan Spross on Tue, 2007-09-04 19:17
Steve,
As you have heard, for some reason the PPA did not attempt to formally include the provisions of PLR 2004 50057, and I do not believe that the proposed technical corrections act will either. Nonetheless, there are custodians that will set up the spousal inherited IRA based on the PLR, so it comes down to finding one. Once the account is set up, the employer plan should not resist the transfer or attempt to withhold tax.
With respect to the NUA, a qualified LSD for NUA purposes only requires that all the assets of similar types of plans be distributed in the same calendar year. The order of the 3 transactions you cited is immaterial, but the process should not end too close to year end, since a trailing dividend paid out the next year could blow the LSD.
Perhaps he should consider selling more of the NUA shares sooner to achieve diversification out of the employer shares, and if he does that, he may not need to take the full extra 200k from the plan, which would put his ordinary income at 300k subject to single tax bracket. While he may eventually need a 72t, if he can defer that decision another 5 years, it will be much easier to select a payout figure that only needs to be appropriate for 5 years instead of 10. However, I think you should be able to locate a custodian to set up the inherited IRA.
Unfortunatetly, there is no way to secure penalty free plan distributions and use NUA as well, due to the problem of intervening distributions which would blow the LSD. Also, it appears his income stream will be too high to realize any benefit from the -0- LT cap gains rate from 2008 through 2010 because the income still counts for bracket determination, so it may be tough to get under the 25% bracket in any year.
Permalink Submitted by Al Fry on Tue, 2007-09-04 20:52
It should not be hard at all to find a custodian to do a inherited IRA, the problem usually is with the QRP. Many will not release the funds, becuase they refuse to follow the PLR.