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Rollovers to IRAs Now Possible For Plan Beneficiaries

MSK Client Alert
January 2007

The government agencies are continuing to issue guidance with respect to provisions of the Pension Protection Act enacted this past summer. IRS Notice 2007-7 includes guidance on the new rules allowing beneficiaries, other than surviving spouses, to make rollovers of plan distributions from qualified plans to IRAs. These rules became effective January 1, 2007.


Under prior law, if a participant died with a significant account balance in a qualified retirement plan and the participant's beneficiary was someone other than a surviving spouse, the beneficiary frequently could not take advantage of the minimum distribution rules that in many cases can allow the stretch-out of plan distributions over a long period of time. For example, if a participant died with a large balance in a 401(k) plan under which the only form of distribution was a lump sum and the participant designated a beneficiary other than a spouse, the beneficiary would be required to receive the distribution all at once, could not make a rollover, and would be taxable on the entire distribution at the time of receipt. By contrast, a surviving spouse can rollover the account balance to an IRA in the surviving spouse's name and then take minimum distributions over the spouse's life expectancy starting when the surviving spouse attains age 70-1/2.

The New Law

The Pension Protection Act changed this situation by allowing non-spouse beneficiaries to make rollovers to Individual Retirement Accounts provided the transfer of funds was made by direct trustee-to-trustee action. Therefore, if the distribution is paid to the beneficiary (rather than directly transferred to the IRA trustee), the beneficiary loses the right to make the rollover once he receives the funds.

The rollover rules for non-spouse beneficiaries are not as favorable, however, as the rules applicable to surviving spouses. The rollover by the non-spouse beneficiary does not extend the period for minimum distributions beyond the period already available to a beneficiary under the terms of existing law. Unlike a surviving spouse, the non-spouse beneficiary cannot wait until he or she attains age 70-1/2 to start taking minimum distributions. The IRA receiving the rollover from the non-spouse beneficiary must be established for the exclusive purpose of accepting the rollover. Therefore, the beneficiary cannot use a pre-existing IRA, for example, from the beneficiary's own deductible or rollover contributions, as could a surviving spouse. The resulting IRA is then treated as an inherited IRA so that the effect is the same as if the participant had made the rollover to an IRA prior to death and designated the beneficiary as beneficiary of that IRA.

The IRS has just issued Notice 2007-7 which clarifies a number of issues with respect to these new rollover rules: 

Although these new rules will apply only in a limited number of cases, they provide an excellent planning opportunity when a decedent dies with significant assets in a qualified retirement plan.

For more information, please contact Robert J. Lowe at or at (310) 312-3180. Robert is a partner at Mitchell Silberberg & Knupp LLP in the employee benefits and executive compensation practice area.


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