The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Minnesota is representative of a common inquiry regarding non-spouse beneficiaries of workplace retirement plan assets. The advisor asked:
“I have a client who is the beneficiary of his son’s 401(k) plan. Unfortunately, the son has passed away. What are my client’s options as a non-spouse beneficiary of qualified retirement plan assets?”
Highlights of Discussion
The plan document for the 401(k) plan will prescribe the payout options your client has as a non-spouse beneficiary of qualified retirement plan assets. The consultants at the Columbia Management Learning Center have reviewed several thousand retirement plan documents for U.S. employers and may be able to summarize the options available to your client. Alternatively, your client can inquire about the options by contacting the employer’s human resource and/or benefits department.
The possible options include:
• Leaving the balance in the plan until distributions are required (which will depend on the age of the plan participant when he or she died and, perhaps, the amount of the inheritance).
• Taking a complete distribution, which would be subject to taxation as ordinary income.
• Rolling the assets over to an inherited IRA for the beneficiary (pursuant to IRS Notice 2007-7, the inherited IRA must be titled, “Recipient’s Name as beneficiary of Decedent,” (e.g., "Tom Smith as beneficiary of John Smith”).
• Converting the inherited assets to an inherited Roth IRA. (See IRS Notice 2008-30, Q&A 7, IRC Sec. 402(c)(11) and IRS Publication 590 for details.)
Conclusion
Historically, the distribution choices available to non-spouse beneficiaries of retirement plan assets were limited (oftentimes, only a complete and immediate payout was available). But currently, non-spouse beneficiaries have many of the same distribution options available to them as spouse beneficiaries do, especially following changes under the Pension Protection Act of 2006. Financial advisors who understand that distribution details depend on the plan document, and those who can interpret those options set themselves apart from the average advisor, and are better positioned to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
