inherited defined benefit plan
I have a client who’s father passed away at age 62. He had participated in a University Defined Benefit Plan and had named my client the beneficiary. She was given three options 1) lump sum distribution, 2) rollover to an IRA, or 3) rollover to a roth IRA. She elected in 2010 a direct rollover to a Roth IRA that she owned under the assumption that the Roth Conversion rules would apply and she would be able to split the income between 2011 and 2012. Is she correct that the income can be split?
Permalink Submitted by Alan Spross on Thu, 2011-01-13 20:20
The income can be split, but there is a much larger problem here. As a non spouse beneficiary, the receiving IRA must be an inherited IRA. Only a spousal beneficiary can roll to an owned IRA. This may require a PLR to allow the receiving IRA to partition off the transferred funds into a properly titled inherited Roth IRA.
The first step is to confirm that the funds were really tranferred into an owned Roth IRA, and if so request that the custodian rectify the error. There is precedent simply re titling the IRA if it did not already contain funds of an owned Roth IRA, but due to commingling of the funds, this one may be more difficult. The equitable solution would be to make an earnings adjusted direct transfer to an inherited Roth using the same net income allocation used when recharacterizing a contribution. If the custodian refuses to do that, a PLR may have to be pursued and these cost upwards of 10k.