5 yr Rule

Permalink Submitted by Denise Appleby on Thu, 2009-01-01 18:39

[quote=”[email protected]“]Pub 590 page 36

Says a beneficiary may be “required” to take funds over 5 yrs? If I am a living breathing beneficiary with a pulse and a heartbeat can someone please tell me a circumstance where I am required to do so? Sure I can take it all in 5 yrs but I want to know where I am “required” to do so?[/quote]

If the participant dies before the [url=http://www.retirementdictionary.com/Required-beginning-date.htm%5DRBD%5B/url%5D, and one of the two occurs:
1. The plan document or IRA agreement requires it,
2. The plan document or the IRA agreement includes the five year option as the default option, and the beneficiary failed to elect the life expectancy option.

Permalink Submitted by charles lore on Thu, 2009-01-01 20:09

Denise , Regarding your point :

1) does this mean a particular ira custodian can my deny beneficary the right of a stretch as spelled out in pub 590. Sure I can do a trustee to trustee transfer as beneficary to get it out of there to another custodian… but the stretch is not a mandatory right? in an IRA that is

2) if the beneficiary fails to elect the stretch …. well this doenst mean 5 yr rule is required … he merely chose not to stretch which he could have.

Permalink Submitted by Al Fry on Thu, 2009-01-01 23:50

I don’t know what the current status is, however it was not unusual a few years back for a custodian to not allow a stretch. Some NQ annuity carriers still do not allow NQ Annuity stretches, even though there have been 3 PLRs allowing same since 2000.

Permalink Submitted by Alan Spross on Fri, 2009-01-02 01:30

The following IRS Revenue Procedure certainly appears to require QRP plans and IRAs to adopt the RMD provisions of the final 2002 ruling no later than 2003. Under this renenue procedure, it appears that these plans had no choice but to conform to the life expectancy default rule.

Perhaps Denise can clarify whether another ruling superceded this, or perhaps certain plans are exempt or other factors apply….

http://www.unclefed.com/Tax-Bulls/2002/rp02-29.pdf

It should also be noted that Ed also refers to the possibility of IRA agreements that do not conform in the att’d, and I have been wondering why they exist since reading that article:

http://www.financial-planning.com/asset/article/613061/saving-stretch.html

Permalink Submitted by Denise Appleby on Fri, 2009-01-02 12:33

Hi Alan,
How about Section 4.2 of the Rev Proc, which provides, in part, that “… [quote][b]Except as provided in the adoption agreement[/b], if the participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the participant’s death is the quotient obtained by dividing the participant’s account balance by the remaining life expectancy of the participant’s designated beneficiary, determined as provided in section 4.1.[/quote]
The Except as provided in the adoption agreement provision allows the plan sponsor to choose an option other than the life-expectancy option. We can also look to the sample Adoption Agreement include in the Rev Proc , which allows the employer to offer the five year option as the only option available to beneficiaries, to allow beneficiaries to choose the five year option, or to default to the five year option if the beneficiary makes no election. See Sections 2 nd 3, on pages 11 and 12 http://www.irs.gov/pub/irs-drop/rp-02-29.pdf.

The same provision applies to defined contribution plans and defined benefit plans, and extend to IRAs

Permalink Submitted by Denise Appleby on Fri, 2009-01-02 12:41

[quote=”[email protected]“]Denise , Regarding your point :

1) does this mean a particular ira custodian can my deny beneficary the right of a stretch as spelled out in pub 590. Sure I can do a trustee to trustee transfer as beneficary to get it out of there to another custodian… but the stretch is not a mandatory right? in an IRA that is

2) if the beneficiary fails to elect the stretch …. well this doenst mean 5 yr rule is required … he merely chose not to stretch which he could have.[/quote]

1) Yes, the custodian can.
A beneficiary can transfer the inherited IRA to another custodian that permits the stretch. This should be done by September 30 of the year following the year of death, so that the election can be made by then.

You are right- the stretch is not mandatory

2) It depends.
If the agreement/plan document defaults to the five year rule with the stretch as an option [i]if elected[/i], and the beneficiary does not elect the stretch by the deadline, then the five year rule is the only option available to the beneficiary….and as you said ” [i]he merely chose not to stretch which he could have[/i]”

Permalink Submitted by Alan Spross on Fri, 2009-01-02 20:40

Thanks, Denise, the “EXCEPT” is the key.