Wednesday, July 14, 2010

A Designated Beneficiary is Key for Employer Plans

You thought you had a hard time understanding the Tax Code? Even the government doesn’t know the rules for these rollovers! Just recently, I got a call from an advisor whose client had a form letter from a government Thrift Savings Plan (TSP). His mother and father had both died within months of each other and the end result is that the TSP balance is now going to his mother’s estate. The TSP letter gave the executor of the estate 60 days to move the funds to an inherited IRA or a check would be issued payable to the estate with 20% withholding taken from the check.

As of 2010 all employer plans (TSP’s, 401(k)’s, etc) must allow a designated non-spouse beneficiary the ability to do a direct rollover (direct transfer or trustee-to-trustee transfer) of inherited plan funds to a properly titled inherited IRA. The key word here is designated, because a non-designated beneficiary does not have this option. But just who or what is a designated beneficiary anyway?

The answer is simple. A designated beneficiary is a named beneficiary with a birth date, i.e. an individual (or a qualifying trust). You must name a beneficiary on the beneficiary form or the form will sometimes say that if no beneficiary is named the beneficiary is my spouse or my children. Then you have a named beneficiary with a birth date. An estate is NEVER a designated beneficiary and is not able to do a direct rollover of inherited plan funds to an inherited IRA.

Additionally, 20% withholding is only required on distributions that are eligible for rollover. A non-spouse beneficiary, such as the estate, is NEVER eligible to rollover a distribution of inherited retirement benefits whether they come from an IRA or an employer plan.

The moral here is that employers or IRA custodians may not always give you correct information. Always, always, always, check with an advisor with knowledge and experience in retirement plans. You sometimes can’t even trust the government.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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