Non spouse beneficiaries are now allowed to move funds from a decedent’s qualified plan to an IRA. In the past the only option was in many cases to take a total distribution and pay the taxes. These transactions are treated as direct rollovers, not transfers. The individual retirement account must be established as a beneficiary account. The IRS suggests using “Tom Smith as Beneficiary of John Smith.”
Qualified plans,such as 401-K plans, are not required to offer a direct rollover option in 2007; however, according to the IRS this provision becomes mandatory for 2008 and all future years.
If a distribution is paid directly to the non spouse beneficiary, the distribution is not eligible for rollover to any retirement account.
To be eligible for a direct rollover there must be at least one human beneficiary or a qualified trust as the beneficiary.
If the decedent died before his required beginning date, no distribution is required for the year of death. Once the funds are in the individual retirement account, if the beneficiary elects to use the five year rule, no distribution is required until the fifth year after death. If the beneficiary elects to take lifetime distributions, the distributions must begin by December 31 of the year after death.
If the decedent died on or after the required beginning date and the decedent didn’t take the required distribution for the year of death, that amount cannot be rolled over. Once the funds are in the individual retirement account the non spouse can elect a total distribution or lifetime distributions based on the beneficiary’s single life expectancy. The distributions must begin by December 31 of the year after death.
If the decedent’s plan contains a provision requiring the beneficiary to use the 5 year rule, the beneficiary must use the 5 year rule when taking required distributions from the IRA. The IRS recently clarified this rule. If the non spouse moves the funds to an individual retirement account by December 31 of the year after death they can elect a total distribution, the five year rule, or lifetime distributions.
If the decedent’s plan contains a provision requiring the beneficiary to use lifetime distributions, the beneficiary must take lifetime distributions from the IRA using the same distribution period that would have been used had the direct rollover not occurred.
The above provisions only apply to distributions taken from qualified retirement plans such as 401-k plans and 403-b plans. None of the above provisions apply to distributions taken from individual retirement accounts by non spouse beneficiaries. Distributions taken from IRAs by non spouse beneficiaries can never be rolled over.
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