Conversion of TIAA-CREF 403b to Inherited IRA
I have a client with a 403b account with TIAA-CREF. He is retired and wants to insure that his beneficiary is able to convert an inherited IRA and stretch the distributions. Prior to speaking with me, he contacted the company and they advised him to leave the money in the 403b and have his son, (the beneficiary) convert to an inherited IRA after his demise. Is this problematic for a non-spousal beneficiary? It seems to me it would be beneficial to move out of the company plan and into and IRA before he dies. Any thoughts?
Permalink Submitted by Alan Spross on Tue, 2009-06-30 17:51
If the son is in a position to pay taxes on an inherited IRA Roth conversion and does not have his own Roth, leaving the plan in the 403b is presently the only way to accomplish this. Once the plan is rolled over to a traditional IRA in a non taxable rollover, the Roth option is eliminated. Either way, the son will have to take RMDs starting in the year following client’s death.
Note that if the client is taking RMDs AND has a pre 1987 accrual in the plan, the RMDs on that portion can be deferred to age 75. A rollover will eliminate that deferral, so this might be another reason to leave the funds in the plan. Of course, the investment options vrs those of an IRA are also a consideration.
Starting next year the plan MUST offer the beneficiary a direct rollover to an IRA, so the question is whether the Roth is a viable concern for them or not. You used the term “conversion” which applies to a Roth conversion, but you may have just been thinking of a rollover to an inherited traditional IRA.
Permalink Submitted by Nikola March on Tue, 2009-06-30 18:24
I was describing a rollover from the company plan to and traditional IRA. If he moves the money into an IRA, isn’t the client eligible to do a Roth conversion in 2010 regardless of income?
Permalink Submitted by Alan Spross on Tue, 2009-06-30 18:54
Yes, the client will be eligible in 2010 regardless of income. If the client rolls to a TIRA and then converts to a Roth IRA, the son would then inherit a Roth IRA. But if the client does not get around to converting, and the son inherits a TIRA, he cannot convert it under present law.
The 3 ways the son can get a Roth from this account are:
1) Client rolls it to TIRA, then converts to a Roth and son inherits the Roth.
2) Client converts directly to a Roth without going through the TIRA, then son inherits
3) Client leaves 403b alone, then son inherits and converts to a Roth.
The one way son cannot get the funds into a Roth would be if client rolls over to TIRA, but does NOT convert and then son inherits the TIRA.
Permalink Submitted by Nikola March on Tue, 2009-06-30 19:23
Thank you for your response. This will certainy help me educate the client about his options.
Permalink Submitted by JAMES MAGNO on Wed, 2009-07-01 21:48
Alan-
Somewhat related but a more general question
You made the comment that “Starting next year the plan MUST offer the beneficiary a direct rollover to an IRA,…”
I am looking at Ed’s update in January 2008 and the IRS announcement which references Notice 2007-7 and the announcement went on to state that “pursuant to impending technical correction, nonspouse beneficiary rollovers will be required on or after January 1, 2008”. I guess that impending technical correction is the December 2008 bill.
My question: has there been any signicant developments since the IRS announcement in January 2008? It appears to me that plan administrators are now required to offer IRA rollover to nonspousal beneficiaries pursuant to Worker, Retiree, and Employer Recovery Act of 2008 which is effective after 12/31/09. Does the 2008 Act that was passed in December 2008 resolve the dubious nature of the early 2008 announcement? Here’s a curveball question: what if 401k participant dies in 2009 but beneficiary delays distribution until 2010? Will this allow those benefciary to execute the rollover 401k to tradition IRA -(inherited IRA)?
Jim
Permalink Submitted by Alan Spross on Wed, 2009-07-01 23:44
Jim,
You are correct that WRERA (12/08) merely resolved the question that the inherited IRA transfer would be mandatory as of 2010, and not optional as the IRS has previously ruled. While many plans allowed the transfer before, several did not. Congress apparently intended the transfer to be mandatory in the initial legislation. The rest of 2007-7 is still valid.
The transfer is not predicated on the date of death of the employee. If employee passes in 2009, the beneficiary is still entitled to a transfer to an inherited TIRA OR inherited Roth IRA in the first plan year that starts after 12/31/09. This is 1/1/2010 for most plans.
But the date of death can still cause a problem. For example, if the employee passed in 2008 and the beneficiary could not get the transfer done in 2009, then the plan provision with respect to RMDs overrides that of the inherited IRA. If the employee passed prior to the RBD and the plan required the 5 year rule, not getting the transfer done before 2010 would lock the beneficiary into the 5 year rule as 2007-7. In this sense, the delay in clarifying the mandatory nature of the transfer has probably cost several beneficiaries their stretch.