403(b)…Rollover
A little help please….I have a client that is trying to get all of her inherited accounts in order and we are running into some conflicting interpretations. Here are the facts as I know them….
This particular account started out as a 403(b) with her mother-in-law. Her mother-in-law passed away in 1985 at age 50. The father-in-law was the named beneficiary. It is believed that this remained as a 403(b) and was retitled in the father-in-law’s name. (Company rep stated that this fell under the “old” rules). The father-in-law passed away in 1996 at his age 75. The mother-in-law would of been age 61. The are no records of the father-in-law taking any RMD’s. My client’s husband was one of two equal beneficiaries from the father-in-law’s account. Based on my client’s conversation with the company rep, the account was still a 403(b) and the husband’s half was titled in his name. The husband passed away in 2009. At that time, my client contacted the company concerning her options. They stated that she was able to delay beginning the RMDs until December 31 of the year her deceased husband would have reached 70 1/2. He was 58 when he died. (My client was 11 years younger than her husband).
To clarify the current account status we did a conference call with the Company. They stated that the account was a 403(b) in my client’s name. They originally said that she could do a simple rollover to an IRA in her name. After checking with a retirement specialist, they then stated that the account could only be transferred to a 401k or 401a and the RMD’s would be based on my client’s age.
I am far from an expert on 403(b) current or “old” rules. If the chain of events were handled correctly by the Company….is there any reason why this can’t be a simple rollover to an IRA in my client’s name.
Any and all comments, questions or clarifications would be greatly appreciated.
Permalink Submitted by Alan Spross on Tue, 2012-04-24 20:03
This could be an extremely complex test question with respect to how RMDs should have been administered from Day 1, particularly if this was a “bifurcated account” with respect to pre 87 accruals (old money) and the post 87 earnings. But all that is pretty much moot at this point, and the IRS has deferred 403b RMD administration almost exclusively to those plans.
That said, the client is getting incorrect information from the plan. If I have got the succession correct here, the client is a successor beneficiary to a successor beneficiary of the designated beneficiary (father in law). At no point were any of those beneficiaries able to assume ownership of the account, ie they were just beneficiaries.
Getting to your central question, under the PPA Sec 829, a transfer to an inherited IRA can be made for a non spouse designated beneficiary. Since ownership could not have been assumed for the 403b plan, there never was a non spouse designated beneficiary. There was first a spousal designated beneficiary who could not become the owner, and then two different successor beneficiaries. A successor beneficiary cannot do the inherited IRA transfer per Notice 2007-7 as this option is limited to designated beneficiaries. A designated beneficiary is the beneficiary whose life expectancy is used to determine RMDs and is named by the plan owner. Once the designated beneficiary passes there can be no additional designated beneficairies, just successor beneficiaries. These successor beneficiaries must maintain the RMD schedule used by the designated beneficiary. Therefore, the year the deceased husband would have reached 70.5 is immaterial to either his RMDs or the client’s.
I don’t know exactly what is required of the “old money” portion of this account with respect to RMDs, but my guess is that the breakdown is no longer applicable after the FIL’s death, and current RMD rules should be applied to the client’s RMDs. If FIL did not have to take RMDs until the year MIL would have reached 75, he was exempt until he passed in 1996. Client’s deceased husband should have begun RMDs in 1997 using the remaining life expectancy of the FIL under the old tables that were replaced in 2002. Even under the 2002 longer mortality divisors, the account would have been fully distributed in 2011 or so.
Your client probably does not have to worry about any historical RMD omissions prior to 2010, and just about any option the plan provides her now will be better than the lump sum I just came up with. They are treating her deceased husband like an IRA owner would be treated, not like the non spouse successor beneficiary that he was. But the IRS is not likely to look into a 403b plan’s RMD calculations.
Permalink Submitted by Samuel Taylor on Tue, 2012-04-24 20:35
Thanks! I don’t think I would of received a passing grade on that question.