When the original owner of a retirement plan dies, can the beneficiaries transfer the benefits to a different retirement account? Sometimes, yes. And sometimes, no.
As a reminder, no beneficiary other than the surviving spouse has the option to take a distribution from an inherited IRA or plan of any type and then roll it over to another retirement account. The only transfer option a nonspouse beneficiary might have is the right to have benefits transferred directly to an inherited IRA.
Inherited IRA? Yes!
Let's start with the easiest case. When an IRA owner dies, whoever inherits the IRA (the "beneficiary") generally is allowed to transfer the assets in that account, via direct "IRA-to-IRA transfer," to another inherited IRA. This is not a "rollover." It’s an IRA-to-IRA transfer--a complete nonevent as far as the tax code is concerned.
The beneficiary may be required to first register the decedent's account as an "inherited IRA," i.e. change the name on the account from "John Doe IRA" to "Jane Doe, as beneficiary of John Doe." That's just a paperwork step the original IRA provider needs in order to accept the beneficiary's instructions. Once the account is properly titled, the beneficiary should be able to move its assets via IRA-to-IRA transfer to a different IRA provider--still in the name "Jane Doe, as beneficiary of John Doe."
The only potential obstacle to this would be, if the IRA contains (or is in the form of) an annuity contract with an insurance company. The contract terms generally are the final word on the beneficiary's options. If the annuity contract that is held by (or actually is, itself) the IRA says it is nontransferable, the beneficiary is stuck with the contract the decedent bought.
If the IRA beneficiary is an estate or trust, and the fiduciary wants to transfer the inherited IRA out of the estate or trust to the individual beneficiary(ies) of the estate or trust, that's fine too--except that some IRA providers balk at this and won't allow it. If faced with that type of IRA provider, the best thing to do is to move the account (still as an inherited IRA in the name of the original estate or trust that was named as beneficiary) to a more cooperative IRA provider--one that will then allow the estate or trust to transfer the account to the beneficiaries of the estate or trust.
Remember, transferring an inherited IRA out of an estate or trust to the individual estate or trust beneficiaries does not change the applicable distribution period. The payout period for the inherited IRA will still be whatever payout period applied to the estate or trust originally named as beneficiary.
Inherited qualified plan? Sometimes!
Things are much more restrictive if the inherited retirement plan is a "qualified plan" such as a 401(k), 403(b), or profit-sharing plan).
The good news: When a qualified plan is left to a "designated beneficiary," the beneficiary is entitled to have the benefits transferred, via "direct rollover," into an inherited IRA the beneficiary has opened to receive the transfer. A designated beneficiary would be: an individual (such as the deceased participant's child), or a qualifying "see-through trust," that was named as beneficiary by the decedent (or multiple beneficiaries, all of whom are individuals or see-through trusts). Even though some retirement plans seem not to be aware of this rule, a designated beneficiary can insist on this right. Thus, for example, if Jane inherits her father's 401(k) plan as named beneficiary, Jane has the legal right to demand that the plan transfer the benefits to an inherited IRA (in the name of "Jane Doe as beneficiary of John Doe") that she has created to receive the "direct rollover."
But this right does not apply to an estate or to a trust that is named as beneficiary, but that does not meet the IRS's stringent requirements for a "qualified see-through trust." If John Doe leaves his 401(k) plan to his "estate" (or non-see-through trust) as beneficiary, the estate or trust will be stuck with whatever payout options the plan provides. There's no way around that rule, though if John Doe's surviving spouse is the beneficiary of the estate or trust she may be able to roll over the benefits to her own IRA "through" the estate or trust.
Also, if the plan is funded with annuity contracts, the annuity contract terms may limit the beneficiary's options.
As you can see, sometimes there is a right to move inherited retirement benefits to another financial institution, and sometimes there isn't. Be sure to insist on your transfer right--if you have one!
Where to read more: For details on titling and transfer of inherited retirement benefits, see Chapter 4 of Natalie Choate's book Life and Death Planning for Retirement Benefits (www.retirementbenefitsplanning.com or www.ataxplan.com); regarding spousal rollover "through" an estate or trust, see Chapter 3. For proper treatment of IRA-to-IRA transfers as a "nonevent" under the tax code, see Instructions for IRS Form 1099-R and 5498, stating that such transfers are not reportable on such forms as either distributions or as contributions.
Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits.The views expressed in this article may or may not reflect the views of Morningstar. The electronic version of Natalie’s book, Life and Death Planning for Retirement Benefits, is now on a new platform with expanded features. The e-book gives you the entire book in word-searchable format, plus two chapters (on life insurance and annuities in retirement plans). Visit www.retirementbenefitsplanning.net to subscribe or learn more.