Estate planning – retirement plan for self employed
I am looking for feedback on whether there continues to be a potential problem when a retirement plan is maintained by a self employed person that dies.
This type of plan which is historically referred to as a keogh plan has in past posed a problem in that the plan is considered terminated upon death ie because it has no participant.
One solution had been to close the plan down before death. Another post mortem fix: annuitize the assets.
Does this problem still exist today?
Thanks much,
Jim
Permalink Submitted by mk foss on Thu, 2009-06-11 22:26
Although the rollover to nonspouse beneficiaries is a big help, there may still be a problem with the retirement plan of a self-employed person; it also arises with a professional corporation with only one owner. The plan would terminate not because of a lack of participatns, the problem is a lack of employer. The IRS has not ruled specifically on this but many feel that the plan is still valid for about 18 months after the death of the employer.
Solutions are: rollover of benefits – this used to work only with a surviving spouse but now should work if there are nonspouse beneficiaries that meet the requirements of the 2006 Pension Protection Act.
There were some rulings that allowed the purchase of an annuity to pay out benefits; I don’t know if plans now provide for this option or if it is something that continues to be done without a ruling.
Closing the plan before death is another option. If the plan is rolled over to an IRA, the beneficiaries have an easier time of knowing the rules and dealing with them. This is an easy solution if the employer is no longer working.
Another solution is to amend the plan or be sure that the plan allows inservice distributions. Then most of the plan assets could be withdrawn periodically and rolled over – presumably leaving only a small balance in the plan upon the untimely death of the employer. You might adopt this solution if the owner is still working and making contributions.
Despite the nonspouse beneficiary rollover available to all in 2010, I still think it’s easier if the plan can be rolled over before the death of the employer. You don’t have problems as to who must do what to start the rollover rolling.