IRA Rollovers by Non-Spouses - Pitfalls

March 22, 2012 - PRLog -- Section 402(c)(11) of the Internal Revenue Code ("IRC") permits a non-spousal beneficiary to inherit a retirement asset and to receive required minimum distributions ("RMDs") based on the Internal Revenue Services' single life table.  For instance, a 58-year-old beneficiary will take his or her distributions based on a life expectancy of 27 years.

To take advantage of the opportunity, the new account must be established by a direct trustee-to-trustee transaction.  The non-spousal beneficiary cannot receive the funds and then deposit them in an IRA within 60 days, as a spousal beneficiary could.  The new account must remain titled in the name of the decedent, to-wit:  "Robert Jones as beneficiary of Jim Jones."  Thus, it is not really a rollover, nor can the non-spousal beneficiary deposit the funds into a pre-existing IRA that holds other qualified funds.

Once the new account has been established, the non-spousal beneficiary cannot wait until reaching 70 and a half years of age before receiving annual RMDs, as can a spousal beneficiary.  When the RMDs must begin is dictated by when the decedent died - before or after his or her required beginning date ("RBD").  If the death was before the RBD then the general rule is that the non-spousal beneficiary is bound by the terms of the plan.  If a lump sum is required then the non-spousal beneficiary must take the lump sum; the lump sum must be paid out by the end of the fifth year following the decedent's death.  However, if the non-spousal beneficiary has done the "rollover" prior to December 31 of the year following the date of death then the life expectancy of the beneficiary can be used in determining RMDs.

If the decedent died after his or her RBD, the non-spousal beneficiary will be able to use his or her life expectancy or that of the decedent, whichever is longer.

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