Deferred Comp

I have a client that inherited his wife’s deferred comp plan in WA State. He is 71 and she was 62 at time of death. He was told that although he is now the account owner, he is not required to take RMD’s until she would have reach 70 1/2? Is that really the case? That would allow him to keep the money growing until he is 78? If that is true, what is the downside of doing this?



It is correct that as SOLE beneficiary of his wife’s plan (he is only the beneficial owner), he does not need to start RMDs until the end of the year that she WOULD HAVE turned 70.5.

There is no downside to doing that except that it will concentrate more taxable income after he is 78 when his own RMDs from his own plans start to grow considerably. He should be sure to name his own successor beneficiary on the plan.

Copy of IRS Regs: 1.401(a)(9)(3) Q&A 3
Q–3. When are distributions required to commence in order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?

A–3. (a) Nonspouse beneficiary. In order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii), if the designated beneficiary is not the employee’s surviving spouse, distributions must commence on or before the end of the calendar year immediately following the calendar year in which the employee died. This rule also applies to the distribution of the entire remaining benefit if another individual is a designated beneficiary in addition to the employee’s surviving spouse. See A–2 and A–3 of §1.401(a)(9)–8, however, if the employee’s benefit is divided into separate accounts.

(b) Spousal beneficiary. In order to satisfy the rule in section 401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the employee’s surviving spouse, distributions must commence on or before the later of—

(1) The end of the calendar year immediately following the calendar year in which the employee died; and

(2) The end of the calendar year in which the employee would have attained age 70 1/2.

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What if the beneficiary already had the account transferred into his name? Is the rule only if the beneficiary remains as beneficiary and the the owner?



Is another downside that his benes would lose the stretch over their LE?



If he rolled this into his OWN IRA, then he must take RMDs based on his own age. If he transferred it to an inherited IRA, he can still defer the RMDs until the year his spouse would have been 70.5. You need to check the registration on the IRA to be sure.

He cannot assume ownership of his wife’s plan, but he CAN maintain his beneficiary interest in that plan. If this is what he has, he can wait to start the RMDs. Some plans may balk on making a transfer to an inherited IRA for a spouse. If this happens, then he may want to maintain the plan where it is until the year before RMDs would have to start, and then transfer it to his own IRA.

Al – See “death of surviving spouse” on p 37 of Pub 590. This also applies to 457 and QRP plans as well. The danger might be in failing to roll over to own IRA at the proper time. In the case of that failure, then the beneficiaries do lose out on the stretch.



Right, I just wanted to point out the other downside for the next 8 years.



I agree with the foregoing explanations concerning MRD’s, providing you are referring to a Government 457(b) deferred comp plan. However, 457(b) non-profit and deferred comp covered under section 409(A), such as a SERP, would be a bit different.

BruceM



I think we took it to be a WA State Def Comp.



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