Keogh Plan and IRA
Can the death distribution from a Keogh plan be “stretched” by a nonspousal beneficiary, i.e. taken by such beneficiary over his life expectancy using either (1) the “Single Life Expectancy Table (for Inherited IRAs)” on page 121 of the 2012 edition of [i]The Retirement Savings Time bomb[/i] or (2) an immediate annuity issued by a life insurance company, or, must the Keogh plan be terminated and rolled to an IRA to get the stretch? If the answer is “Yes,” then what is the advantage of rolling the Keogh to an IRA? Please supply a citation to the Internal Revenue Code, the Regulations or Ed Slott’s book.
Permalink Submitted by Alan Spross on Tue, 2012-06-05 21:30
Yes, the RMD rules apply to Keogh plans as to other qualified plans. However, some older Keogh plans may not have been amended to offer the broader options that IRAs provide to non spouse beneficiaries. For example, a given Keogh plan might possibly require the 5 year rule for death prior to the required beginning date.
Per Pub 560, p 12 – Specific reference to Keogh plans as qualified plans (either DB or DC plans)
p 13 – Reference to qualified plans adherance to the 2002 RMD Regs. which include the options for non spouse beneficiaries
An IRA rollover may provide more and less costly investment options and since Keoghs have mostly been replaced by solo K, SEP IRA and SIMPLE IRAs plans, there are many custodians who do not handle Keoghs or are not familiar with them. Creditor protection varies by state with respect to IRA vrs Keogh.
Permalink Submitted by mk foss on Tue, 2012-06-05 22:20
The concern with a Keogh Plan and a “stretch” to a nonspouse beneficiary is that the plan must be “qualified” throughout the stretch period. If the decedent was the only owner-employee, there would be no employer and the plan COULD lose its qualified status. The solutions are an immediate annuity as you mention and the rollover to an inherited IRA as Alan has described. This potential problem could also exist with a professional corporation that has only one owner-employee.
The nonspouse rollover has been the solution to most of these potential problems.
Permalink Submitted by Denise Appleby on Wed, 2012-06-06 14:10
I agree with Mary Kay. This is a big compliance issue in the small employer plans area- please be careful. If there is no employer, then there can be no qualified plan, as a qualified plan can only be maintained by an employer.
If the sole owner of the business dies, then the plan may be an ‘orphan’ or ‘abandoned’ plan, and the qualified termination administrator designated to handle the trustee duties should take steps to terminate the plan. The qualified termination administrator would determine whether the plan is abandoned.
The plan must be amended up to date before it is terminated. If the plan is not amended up to date, no amounts from the plan can be rolled over to an IRA or any other retirement plan.