7.14 Payouts to Beneficiaries

As the beneficiary of a qualified plan account (corporate or self-employed plan), including a 403(b) tax-sheltered annuity or Section 457 plan, your distribution options depend on the terms of the plan. You may prefer the option of receiving payments over your life expectancy, but the plan may require that you receive a lump-sum distribution or allow installment payments over only a limited number of years.

Although IRS final regulations generally allow beneficiaries to use a life expectancy distribution method, the IRS rules represent the longest permissible payment period. Qualified plans are allowed to require a shorter period and most do.

If you receive a lump-sum distribution, you generally may make a tax-free rollover to another plan, but the rollover options are more restricted for nonspouse beneficiaries than for surviving spouses as discussed below.

If the plan participant was born before January 2, 1936, and you receive a qualifying lump sum, you may claim special averaging (7.6).

Surviving spouse.

If you are a surviving spouse and receive a distribution that would have been eligible for rollover had your spouse received it, you may make a tax-free rollover to the qualified plan of your employer or to your traditional IRA. If you make a rollover to a traditional IRA, subsequent withdrawals are subject to the regular IRA distribution rules (8.8).

If you do not make a rollover and the payer plan gives you the option of taking distributions over your life expectancy as allowed by the IRS rules, you may be able to delay the commencement of distributions for several years. If your spouse died before the year in which he or she attained age 70½, and you are the sole designated beneficiary of the account as of September 30 of the year following the year of death, you do not have to begin receiving required minimum distributions (RMDs) until the end of the year in which your spouse would have attained age 70½. This is an exception to the general rule that requires RMDs under the life expectancy method to begin by the end of the year following the year in which the plan participant died.

Nonspouse beneficiary.

If you are the designated beneficiary of a deceased plan participant who was not your spouse, you are allowed to roll over a distribution, but only by means of a direct trustee-to-trustee transfer to an IRA that is set up as an inherited IRA (7.8). If the transfer is to a Roth IRA, you are taxed as if you made a conversion from a traditional IRA (8.21). If you do not make such a trustee-to-trustee transfer, you must receive distributions as required under the terms of the deceased participant’s plan.