rules for inheriting a qualified retirement plan (QRP)?

[statsguy]

What are the rules pertaining to a non-spouse inheriting a qualified retirement plan (QRP), such as a 401k, 403b, 457. It is my understanding that the rules are similar to inheriting a traditional IRA, except that you can convert it to a ROTH.

Stats

[sscritic]

For a 403(b)

Nonspouse beneficiary. A nonspouse beneficiary may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer to an inherited IRA established to receive the distribution. If the rollover is a direct trustee-to-trustee transfer to an IRA established to receive the distribution:
The transfer will be treated as an eligible rollover distribution.

The IRA will be considered an inherited account.

The required minimum distribution rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA.

For more information on IRAs, see Publication 590.

http://www.irs.gov/publications/p571/ch08.html

I didn't look anywhere for Roth exception, but it might be in Pub 590. Where did you get your understanding?

[statsguy]

Thanks.

In the link above, if you go to the section Eligible Retirement Plans you will see that QRPs are eligible for rollover. Form 590 gives a bit more detail.

Stats

[Alan S.]

A non spouse beneficiary of a qualified retirement plan or 403b can do a direct rollover to either an inherited TIRA or an inherited Roth IRA account. The RMDs from either type of inherited IRA are the same, although taxation is obviously different. As you mentioned, the inherited Roth is not an option when a non spouse inherits a TIRA.

A key date to keep in mind here is that if the direct rollover is not done by 12/31 of the year following participants death, the RMD rules for plan beneficiaries will apply to the inherited IRA. One costly example of this is where the QRP requires the 5 year rule when the participant passes prior to the RBD. If the beneficiary does not complete the direct rollover by the deadline, their inherited IRA RMD will also be subject to the 5 year rule. The same 12/31 date also applies when there are multiple beneficiaries if each beneficiary wants to use their own life expectancy instead of that of the oldest beneficiary.

If the plan participant passes prior to the RBD, the non spouse beneficiary is also required to distribute the decedent's RMD for the year of death to the extent of the RMD remaining.

[bsteiner]

In response to sscritic, it's in Section 402(c)(11), which was added by the Pension Protection Act of 2006, and was amended by the Worker, Retiree, and Employer Recovery Act of 2008.

[sscritic]

In response to sscritic, it's in Section 402(c)(11), which was added by the Pension Protection Act of 2006, and was amended by the Worker, Retiree, and Employer Recovery Act of 2008.

Thank you. I do like to read references for myself.

[statsguy]

Thanks all...especially to Allan for the detailed rules. I should have looked at the relevant IRS code for myself but did not find it on the first pass through Google... so thanks to SSCritic too for finding the link.

Stats

[sscritic]

I found this notice to be helpful: Miscellaneous Pension Protection Act Changes Notice 2008-30
http://www.irs.gov/pub/irs-drop/n-08-30.pdf

While it doesn't specifically mention inheriting from a qualified plan, it does discuss rollovers to a Roth from a qualified plan.

Prior to amendment by PPA ’06, § 408A of the Code provided that a Roth IRA could only accept a rollover contribution of amounts distributed from another Roth IRA, from a nonRoth IRA (i.e., a traditional or SIMPLE IRA) or from a designated Roth account described in § 402A. These rollover contributions to Roth IRAs are called “qualified rollover contributions.”
...
Subject to the limitations described in the final sentence of A-1 of this notice [income limits, since repealed, I think], the new definition of qualified rollover contribution in § 408A(e) includes distributions from annuity plans described in § 403(a) and (b) and from eligible governmental plans under § 457(b).

402(c)(11) is what says an inheritance by a non-spouse from an eligible retirement plan transferred to an IRA is an eligible rollover distribution (subject to direct trustee-to-trustee transfer). 408A(e) says that a rollover from an eligible retirement plan is a "qualified rollover contribution" to a Roth. At least I think that is what all this says.

(1) In general
The term “qualified rollover contribution” means a rollover contribution—
(A) to a Roth IRA from another such account,
(B) from an eligible retirement plan, but only if—
(i) in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408 (d)(3), and
(ii) in the case of any eligible retirement plan (as defined in section 402 (c)(8)(B) other than clauses (i) and (ii) thereof [this excludes IRAs]), such rollover contribution meets the requirements of section 402 (c), 403 (b)(8), or 457 (e)(16), as applicable.
For purposes of section 408 (d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.

[Alan S.]

The RMD rules have not all been included in the tax code. If you scroll down to Q 17 (see Special rule) in Sec 829 (PPA reference) in Notice 2007-7 following you will see the rather complex RMD rules when a non spouse beneficiary does a transfer to an inherited TIRA and the deadlines that must be met:

http://benefitslink.com/src/irs/notice2007-7.pdf

But note that 2007-7 itself has been affected by later IRS Notices, so some of this Notice has been superceded.
2008-30 deals with transfers to Roth IRAs, both for the owner (qualified Roth rollovers similar to conversions) and for the beneficiary.
WRERA (tax act signed by Bush in Dec 08) then makes these transfers mandatory for qualified plans. Under 2007-7 they were optional.

In some cases the explosion of portability options in the last decade has created ambiguities that the IRS has had trouble unwinding. One of the notable issues is isolating basis in qualified plans where the pro rate rules the IRS desires to be applied to distributions (Notice 2009-68) is itself conflicted with Sec 402(c)2.

It will be interesting if the various calls for simplification of retirement plan offerings and rules will ever occur. The transition would be challenging.