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Beneficiary Rollovers and Roth Conversions

Choices abound for designated beneficiaries of inherited qualified plans.

Natalie Choate, 01/15/2010

Natalie Choate will be speaking at a location near you if you live in Atlanta (Sept. 30); Scottsdale, Ariz. (Feb. 5); Los Angeles (Feb. 7); San Antonio, Texas (March 16); Birmingham, Ala. (April 30); Chicago (May 4 and Aug. 20); Milwaukee (Jan. 14); Rochester, N.Y. (May 13); Indianapolis (June 4); Boston (April 26, May 21, and June 11); Memphis (Jan. 22); Orlando, Fla. (Jan 28 and Feb. 28); Traverse City, Mich. (May 7); Detroit (Oct. 29); Minneapolis (June 22); Philadelphia (July 23); Harrisburg, Pa. (Dec. 7); or Kansas City, Mo. (Sept. 24). See all of Natalie's upcoming speaking events at www.ataxplan.com.

In 2010, choices abound for the designated beneficiary of an inherited qualified plan--including the option of conversion to an inherited Roth IRA.

Question: My father died in 2008, leaving his company profit-sharing plan benefits to my sister and me equally. The only form of death benefit under the plan is a lump sum distribution. So far the plan has not distributed anything, but the plan administrator tells us we must take out the money soon. We are both younger than age 59½ and we both have incomes over $100,000. What are our options for handling this inherited lump sum distribution?

Natalie: Because it is 2010, you have more choices than ever before regarding this inherited plan.

Just a few years ago, your only "choice" for this plan would have been to take the lump sum distribution in cash immediately, include the taxable portion of the distribution (which is 100% in most cases) in your income, and invest whatever was left after paying the income tax. You can still do that, but you also have other choices now: You can have the benefits transferred directly into an "inherited" IRA or into an "inherited" Roth IRA), then take a life expectancy payout from the "inherited" IRA or Roth IRA.

Transfer to an Inherited IRA for Life-Expectancy Payout
First, the plan must offer you the option of having your inherited benefits transferred, by direct trustee-to-trustee transfer, into an "inherited IRA." The IRS calls this type of transfer a "direct rollover." 2010 is the first year that plans are required to offer direct rollovers to nonspouse beneficiaries. For 2008-2009 plans could but were not required to offer beneficiaries this option.

To get this done, you should first open up an "inherited IRA" at the IRA provider firm of your choice. The titling of the account should be "IRA of [Father's Name], deceased, payable to [Beneficiary's Name] as beneficiary." Another form of title acceptable to the IRS is "[Beneficiary's Name] as beneficiary of [Father's Name]." Then, following the procedural instructions given by the IRA provider and by the plan administrator of your father's plan, instruct the plan to transfer the funds directly in to the newly-created so-called "inherited" IRA.

Note that the plan may require you and your sister to take out the 2010 minimum required distribution before transferring the rest of the benefits into the inherited IRA(s).

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