"Stretch" IRA availbility | Ed Slott and Company, LLC

"Stretch" IRA availbility

Good Morning I am requesting assistance with the following fact pattern: FACTS: 401(k) account owner, dies in 2010 at age 65 Daughter is the sole beneficiary 401(k) provider informs the daughter her only option (per the plan document) is the 5-year rule Daughter sets up a beneficiary account within the 401(k) plan; leaving assets in the plan Daughter in 2012 rolls the plan assets into an inherited IRA. Questions: Does the daughter as a non spouse beneficiary still have the "stretch" available to her? I understand she should have taken her initial RMD by 12/31/2011 Does she have the ability to take retoacitively make up her 2011 missed RMD? Or is she stuck with the 5-year rule? Any guidance offered is much appreciated. Thank you, Brian

Unfortuneately, she missed an important deadline. Following is copied from Notice 2007-7, the "special rule": >>>>>>>>>>>>>>>. (2) Special rule. If, under paragraph (b) or (c) of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary. >>>>>>>>>>>>>> Since she missed completing the transfer to the inherited IRA by the 12/31/2011 deadline, she is now stuck with the 5 year rule. Another portion of 2007-7 indicates that if the deadline is missed the inherited IRA must be distributed under the same rule as the plan. If the plan's only option was the 5 year rule, that also applies to the IRA. As such, there are no RMDs required for any particular year, but the entire inherited IRA must be fully distributed by 12/31/2015. The only way around this now would be to verify that the plan provisions were never changed to make life expectancy the default ruling at some point. But they are not required to do that.

Alan, As always I appreciate you lending the board your extensive knowlege. Here is a quote from your reponse: "If the plan's only option was the 5 year rule, that also applies to the IRA" Your comment along with wording in notice 2007-7 Q&A 19 leads me to believe: If an employer plan offers the 5-year rule only (i.e. life expectancy is not an option) to a non-spouse that the stretch is not availalbe even if the assets are trusteed transferred to an IRA in a timely fashion (i.e. prior to 12/31 following the year of death). Moreover 5-year rule would apply even in a properly titled inherited IRA. Am I understanding this correctly? Please confirm. Thank you!

No, the transfer to an inherited IRA by the deadline would allow the beneficiary to avoid the 5 year rule no matter the plan provisions were. But if the transfer is made after the deadline, the IRA must adhere to the same rule as the plan. In this specific case then, life expectancy is only available to this beneficiary if the plan information given was incorrect and the plan itself allowed life expectancy for deaths prior to the RBD.

Alan On final question... Does the answer change if the IRA rolllover was completed in 2011 (as opposed to 2012)? Would the life expectancy payout now be available to the non-spouse? Could the 2011 RMD be taken retroactively; paying the 50% penalty? Thanks.

Yes, if the transfer to an inherited IRA was completed by 12/31/2011 then life expectancy could be used from the inherited IRA. For the 2011 RMD, it would be recommended to take the life expectancy RMD from the 401k first. Since this was not done and the entire balance was rolled to an IRA, the 2011 RMD becomes an excess contribution to the inherited IRA and needs to be removed with applicable earnings. For 2012 and beyond, life expectancy RMDs from the IRA can continue.
 

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