Good news gone awry. read this if u plan to die after 2007 and you have IRA that will be inehrited. and ofcourse if u care after u die.
marketwatch.com
New retirement-plan rule was good news for beneficiaries, until
Last Update: 9:32 PM ET Feb 7, 2007
BOSTON (MarketWatch) -- The Pension Protection Act, which became law at the start of this year, seemed to solve a vexing problem.
The problem had to do with differing treatment for some non-spouse beneficiaries. Before the PPA became law, non-spouse beneficiaries of IRAs got to take distributions from their IRAs over their lifetime, but non-spouse beneficiaries of employer-sponsored retirement plans got the short end of the stick. They had to take distributions in a tax-unfriendly manner -- typically in a lump sum or over five years.
In essence, employer plans were more restrictive than IRAs.
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Under PPA, non-spouse beneficiaries of employer-sponsored retirement plans were supposed to be treated the same as non-spouse beneficiaries of IRAs. That is, PPA changed the rules so that all non-spouse beneficiaries could to take distributions over their lifetime, provided that the non-spouse beneficiary transferred the assets from an inherited employer-sponsored plan into an inherited IRA via a trustee-to-trustee transfer.
Unfortunately, the IRS has just rained on the non-spouse beneficiaries' parade, issuing Notice 2007-07, "guidance" that outlines who gets to take distributions over their lifetime and who doesn't. That guidance has this nation's retirement plan experts issuing their own guidance, along with some choice words for Uncle Sam.
While the IRS Notice does provide important guidance, it also creates a few important points of confusion that still need to be clarified, and fails to provide any help for non-spouse beneficiaries of people who died before 2006, according to Michael Kitces and John Olsen, who co-wrote their observations in the current issue of Steve Leimberg's Employee Benefits and Retirement Planning E-mail Newsletter. "The Notice is extremely disappointing," Barry Picker and Bob Keebler co-wrote, also in Leimberg's newsletter.
IRS does offer some clarity
Kitces and Olsen said the IRS Notice makes it quite clear that the rollover must be done as a direct trustee-to-trustee rollover to qualify for the tax-friendly distribution rules. If, by chance, the assets are distributed to the non-spouse and then transferred into the IRA, then Uncle Sam views the distribution as a taxable event.
The Notice also makes it clear that the trustee-to-trustee rules apply to 401(k), 403(b) and 457 retirement plans. And the Notice makes it clear that the inherited assets must be transferred to a properly-titled inherited IRA, one that says something like "John Doe inherited IRA for the benefit of John Doe, Jr."
The Notice also outlines what amounts are eligible for the rollover and how post-death required minimum distributions should be determined after the rollover, Kitces and Picker wrote. Suffice it to say it's complicated, but with the help of a qualified professional it should be navigable shoals.
But as with most things in life, the devil is in the details. For instance, Kitces and Picker note that employers are not required to offer non-spouse beneficiaries the option of doing a direct rollover. To do so, experts say, might force employers to amend their retirement plan documents, something they may not want to do. In addition, the IRS Notice suggests that employers, if they offer the option, must do so for everyone or no one. It must be allowed on what's called a non-discriminatory basis.
Easy going for plans inherited in 2006, 2007 and beyond
Kitces and Olsen said non-spouse beneficiaries who inherit employer-sponsored plans in 2007 and in years to come need only follow these guidelines to have their IRA and distributions, too:
1. Verify that the plan document allows for direct rollovers as a non-spouse beneficiary post-death distribution option;
2. Take the required minimum distribution for the year of death if the decedent died after his/her required beginning date;
3. In the year following the year of death, take the applicable required minimum distribution that would apply under the life expectancy rule; if the plan document provides for the five-year rule by default, be certain that this distribution is taken to establish the application of the life expectancy rule;
4. Complete the rollover via a direct trustee-to-trustee transfer; be certain the receiving account is properly titled to reflect that it is an inherited IRA, with the decedent's name as well as the beneficiary's name in the account registration;
5. If the beneficiary is a trust, be certain to provide the plan document to the inherited IRA custodian by October 31 of the year following the year of death.
"As long as these five steps are followed for future decedents, the ability for a non-spouse beneficiary to establish and preserve the maximum stretch under the life expectancy in the subsequent inherited IRA can be preserved," Kitces and Olsen wrote.
In addition, Kitces and Olsen warned non-spouse beneficiaries to avoid these three mistakes:
1. Don't confuse a "direct rollover" with the regular rollover rules applicable to IRAs. A direct rollover is one accomplished by means of a trustee-to-trustee transfer by having the check made payable directly to the (properly-titled) receiving inherited IRA account. The beneficiary should not, under any circumstances, have a check payable and distributed directly to himself/herself; if such a distribution occurs, it may not be rolled over, and the amount will be irrevocably distributed.
2. Be certain that the receiving IRA is properly titled as an inherited IRA. Such direct rollovers should not and cannot be made to an individual's existing traditional/rollover IRA. If an individual has the funds rolled from the inherited employer retirement plan account to the wrong IRA, the funds may be deemed distributed, irrevocably forfeiting the ability to preserve the non-spouse beneficiary stretch.
3. For retirement plan documents that actually apply the five-year rule as the default and only method, or that provide a choice to the beneficiary between the two, be certain to take a distribution in the year following the year of death to affirmatively apply the life expectancy rule.
Rules are confusing with regard to recent deaths
"Unfortunately, while IRS Notice 2007-7 can get an A- grade for prospective guidance, it gets a D+ at best as transitional guidance," Kitces and Olsen wrote.
To wit: PPA's rules seemingly apply to rollovers that occur after Dec. 31, 2006 without any regard to the original retirement plan owner's year of death. Thus, Kitces and Olsen say the chance for a non-spouse beneficiary to rollover an inherited plan "would ostensibly apply equally to those who had died in the past, as well as those who die in the future."
Unfortunately, the Notice offers little guidance on this issue. First, most if not all employer-sponsored retirement plans in existence don't offer direct rollovers as an option. "It remains totally unclear what steps plans must take (if any) to actually allow for non-spouse beneficiary rollovers," Kitces and Olsen wrote. "Is it simply a matter of the plan deciding on an administrative basis to allow such direct rollover checks to be issued? Or must the plan document actually be amended to allow for rollovers? If an amendment is necessary, what requirements apply for the proper adoption of the amendment?"
The second problem is this: for those who died in 2006 or 2007, the rules are straightforward, said Kitces and Olsen. The non-spouse beneficiary simply takes the current year's required minimum distribution under the life expectancy rule and then completes an inherited IRA and continues to take distributions using the life expectancy rule. But the rules give no guidance for pre-2006 deaths, especially for those who have a plan document that otherwise requires the five-year rule for non-spouse beneficiaries.
What's the bottom line? "In plain English, if you are the non-spouse beneficiary of a plan participant who died in 2006, take a minimum distribution in 2007 based upon the lifetime payout over the (oldest) beneficiary's life expectancy, and hope that the plan will permit the direct transfer to an inherited IRA," Picker wrote in an e-mail. "If yes, make sure the inherited IRA is properly set up as an inherited IRA. If the plan will not permit the transfer, yell like hell until they do."
And, if by chance you are a non-spouse beneficiary of someone who died prior to 2006, Picker said, "Hope that the IRS issues further guidance that will permit the beneficiary to get out from the five-year rule and into the lifetime payout. If they don't, there isn't much that can be done."
For their part, Kitces, Picker, Olsen and others are now begging the IRS to address the unanswered questions. With hope, those who inherited IRAs before 2006 will have a fighting chance to take distributions over their lifetime as do those who inherit an IRA.
A guide to the new rules
Assuming the plan participant died before his required beginning date and the "five-year rule" is in effect in the plan (the most likely scenario), here is where we stand, according to Picker and Keebler.
* If death occurred in 2001 or earlier, the question is moot, as the plan should have already distributed the entire plan balance before the end of 2006.
* If death occurred in 2002, then 2007 is the fifth year. The entire balance is a minimum distribution for 2007, and none is eligible to be transferred to an "inherited" IRA.
* If death occurred in 2003, 2004 or 2005, then the entire balance is eligible to be transferred to an "inherited" IRA, but the "inherited" IRA must be distributed no later than Dec. 31 of the year of the fifth anniversary of the plan participant's death.
* If death occurred in 2006, then the entire balance is eligible to be transferred to an "inherited" IRA, and if the transfer occurs in 2007, then the beneficiary can use the life expectancy option, provided the first distribution is taken in 2007.
* For deaths in 2007 and later, the key is for the beneficiary to do the trustee-to-trustee transfer before Dec. 31 of the year following the year of the plan participant's death, and take the first distribution prior to end of that |
