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Rollover Options for Non-Spouse Beneficiaries of QRPs

As a Non-Spouse Beneficiary, What should you do when you inherit a Retirement Plan?

Are you aware that a non-spouse beneficiary, such as a child, grandchild, brother, or sister, who inherits the assets from a Qualified Retirement Plan (QRP) is allowed to roll the assets directly into a Traditional inherited beneficiary IRA, or convert those assets to a Roth inherited beneficiary IRA? 

Non-spouse beneficiaries have traditionally not been permitted to roll over inherited QRP (or IRA) assets into their own IRA.  However, under the Pension Protection Act of 2006 (PPA ‘06) and IRS Notice 2008-30, a Traditional or Roth beneficiary IRA can now be established and distributions flow from the deceased participant’s QRP directly into the beneficiary IRA through a trustee-to-trustee transfer or Roth conversion.  When converting into a Roth, the after-tax assets may be rolled tax-free and any pre-tax assets converted will be taxed as ordinary income.  Although the transfer is technically called a “direct rollover,” constructive receipt (checks payable to a beneficiary) must be avoided, as rollovers received from non-spouse beneficiaries are not permitted.  Constructive receipt results in the loss of the benefit and immediate taxation.  Note that in order to be eligible to roll to a Roth Beneficiary IRA, the beneficiary must have less than $100,000 (single or joint) of adjusted gross income.   However, the $100,000 eligibility restriction is eliminated in 2010.

IRA rules must be followed

Once the assets are received into a beneficiary IRA, all Required Minimum Distribution (RMD) rules apply.  Generally, if a QRP participant was taking RMDs prior to his or her death, a beneficiary’s RMDs will commence by December 31 of the year following the QRP owner’s death, calculated based on the beneficiary’s single life expectancy, determined by referencing the IRS Single Life Expectancy Table.  If the deceased QRP participant was not taking RMDs, the five-year RMD option may also be selected.  With this option, the entire balance of the beneficiary IRA must be distributed before the end of the fifth year following the year of the QRP owner’s death. 

Beneficiary IRA advantages

By allowing direct rollovers, non-spouse beneficiaries can:

·         Possibly defer taxes for a longer period of time – Some QRPs may require a quicker payout period for non-spouse beneficiaries and life expectancy RMDs may not be available, thus resulting in immediate taxation.

·         Convert to a Roth beneficiary IRA if eligible – By converting and paying any tax due now on the current value, as smaller RMDs are received, potentially larger tax-free growth continues.  

·         Preserve the Stretch IRA strategy – Once the assets are in a beneficiary IRA, the beneficiary is allowed to name his or her own beneficiaries, if the IRA custodian permits.  If the beneficiary of the inherited IRA dies before reaching his or her full life expectancy, the IRA assets can continue to be paid to the next beneficiary over the remaining distribution period of the deceased beneficiary.

New opportunity

Because of PPA ’06 and Notice 2008-30, non-spouse beneficiaries of QRPs are now offered the opportunity to establish beneficiary IRAs at the institutions of their choice and self-direct the assets within the products offered by that institution, rather than be limited to the QRPs investments.

This information is for educational purposes only.  It is always recommended that you seek the aid of a competent tax advisor or tax attorney to assist you with tax advice and guidance.

To better understand your options as a non-spouse beneficiary. Please take a minute to order a Rollover Kit.

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