Spouses and Other Beneficiaries
Spouse’s IRA Ownership Election Significantly Impacts Retirement Plan Rollovers. – A
retiree's surviving spouse may roll over a distribution from the retiree's qualified retirement plan
into an IRA in which the spouse is the beneficiary – or alternatively into an IRA the spouse
“owns.” Depending on the spouse’s choice, the timing and amounts of required minimum
distributions from the IRA and the application of the 10 percent penalty tax on early distributions
will likely differ. (Ltr. Rul. 200450057.) See Chapters 5 and 8 of the treatise for discussions of
your spouse’s election to own your IRA.
Spousal Rollover to IRA Permitted after Another Beneficiary's Proper Disclaimer. – The tax
law treats a retiree's surviving spouse as the direct recipient of qualified retirement plan benefits
received because another beneficiary properly disclaimed them (i.e., legally renounced them).
Thus, the spouse may generally roll the benefits over tax-free to his or her own IRA. (Ltr. Rul.
200505030.) Further, the disclaimer is not invalid merely because the disclaimant received the
retiree's final required minimum distribution. Rev. Rul. 2005-36, 2005-26 I.R.B. 1368. See
Chapter 2 of the treatise for an explanation of tax-free rollovers from qualified retirement plans.
Rollovers to IRAs Allowed for Some Indirect Distributions to Surviving Spouses. – A
surviving spouse may generally roll over IRA distributions or qualified retirement plan
distributions passing to the spouse indirectly through a trust or estate – if the spouse has the
unconditional power to obtain the distributed funds. For example, a surviving spouse may
generally roll over a qualified plan distribution passing through the deceased spouse’s estate
where (i) the surviving spouse is the executor of the estate and (ii) the distribution must pass to
the surviving spouse as the only beneficiary. (Ltr. Rul. 200444032.)
Similarly, a surviving spouse may generally roll over an IRA or Roth IRA distribution passing
through the decedent’s trust where (i) the surviving spouse is the trustee and (ii) the trust
actually distributes the funds to the surviving spouse or his or her IRA. (Ltr. Rul. 200424011; Ltr.
Rul. 200742032.) See Chapters 2, 5, and 6 of the treatise for explanations of tax-free rollovers
from qualified retirement plans, IRAs, and Roth IRAs.
IRA Ownership Election by Surviving Spouse May Lengthen Children’s Tax Deferral. – A
retiree's surviving spouse and children may all be current beneficiaries of a “qualified” trust that
is in turn the beneficiary of the retiree's IRA. If so, the IRA may generally make required
minimum distributions over a period no longer than the life expectancy of the oldest beneficiary
(Normally the spouse).
However, the IRS has ruled such an IRA may spread minimum distributions to the children over
the longer life expectancy of the oldest child – if the surviving spouse transfers his or her share
to a separate IRA that the spouse elects to treat as his or her own. To achieve this longer tax
deferral for the children, the surviving spouse must make the transfer and ownership election
before September 30 of the year following the decedent’s death. (Ltr. Rul. 200449042 and
200449041.) See Chapter 8 of the treatise for an explanation of minimum distribution
requirements and Chapter 5 for spousal ownership elections.
QDRO Distributions Taxed to Spouse Regardless of Community Property Laws. – A
distribution from a retiree's qualified retirement plan to the retiree's spouse or former spouse
under a court’s “qualified domestic relations order” (a QDRO) is generally taxable to the
spouse. The Tax Court has held that community property laws of a state do not change this
result – i.e., do not make the distribution taxable to the retiree to the extent the spouse received it
under the QDRO. Seidel v. Commissioner, T.C. Memo 2005-67 (2005). See Chapter 2 of the
treatise for a discussion of QDROS under qualified retirement plans.
Indirect Plan Distributions for a Spouse Not Taxable to the Spouse. – A taxpayer’s spouse or
former spouse is not required to pay tax on an amount paid to him or her pursuant to a court’s
domestic relations order requiring the taxpayer to withdraw funds from a qualified retirement
plan and pay the funds over to him or her. Rather, the plan distribution is taxable to the
withdrawing taxpayer since such an indirect payment to a spouse cannot qualify as a payment
under a “qualified domestic relations order” (a QDRO). Amarasinghe v. Commissioner, T.C.
Memo 2007-333 (2007). See Chapter 2 of the treatise for a discussion of QDROS under
qualified retirement plans.
Optional Spousal Annuity in Lieu of Required Joint and Survivor Spousal Annuity. – Many if
not most qualified retirement plans are required to provide a retiree with an annuity payable for
the retiree’s lifetime and, after the retiree’s death, to his or her spouse for the spouse’s lifetime
(a “J&S annuity”). The amount of the annuity payment to the surviving spouse must be in the
range of 50 percent to 100 percent of the amount of the payments to the retiree during his or her
lifetime. The exact percentage is determined by the terms of the plan.
In the past, a retiree could generally waive the J&S annuity during the 90-day period ending on
the annuity starting date and instead choose another payment option. After 2006, the Pension
Protection Act allows 180 days for the waiver. Nevertheless, as in the past, the waiver is
generally not effective without the consent of the retiree’s spouse.
After 2007, qualified plans must generally offer an optional survivor’s annuity as an alternative to
a J&S annuity. As with the J&S annuity, the optional annuity is payable for the retiree’s lifetime
and, after the retiree’s death, to his or her spouse for the spouse’s lifetime. However, the
amounts of the annuity payments are different for the optional annuity.
If the J&S annuity provides the surviving spouse with annuity payments that are less than 75
percent of the payments to the retiree, the optional annuity must provide for payments to the
surviving spouse equal to 75 percent of the payments to the retiree. If the J&S annuity provides
the surviving spouse with payments that are 75 percent or more of the payments to the retiree,
the optional annuity must provide for payments to the surviving spouse equal to 50 percent of
the payments to the retiree.
Under either the J&S annuity or the optional annuity, the present value (discounted value) of the
expected future annuity payments to the retiree and surviving spouse must equal the present
value of a lifetime annuity otherwise payable to the retiree alone. The idea is that it should cost
approximately the same amount to purchase any of these annuities from a commercial issuer
of annuities. Thus, an increase in the surviving spouse’s payments under the optional annuity
will necessarily reduce the amount of the payments to the retiree during his or her lifetime, and
conversely, a decrease in the surviving spouse’s payments will increase the retiree’s payments.
See Chapter 2 of the treatise for a more complete discussion of spousal annuity requirements.
(Pension Protection Act of 2006, Pub. L. No. 109-280, § 1004(a), (c); I.R.C. § 417(a), (g).)
Rollovers by Nonspouse Beneficiaries from Decedents’ Retirement Plans to IRAs. – The tax
law has long allowed surviving spouses to roll over certain distributions tax-free from their
deceased spouses’ retirement plans to their own IRAs. Such rollovers may allow surviving
spouses to utilize methods of distribution not available for distributions from retirement plans.
Similarly, after 2006, a “designated beneficiary” who is not the decedent’s spouse may
authorize a tax-free trustee-to-trustee rollover from the decedent’s consenting “eligible
retirement plan” to a newly established IRA. For this purpose, a designated beneficiary (1) is
generally an individual specifically designated as a beneficiary by the governing instrument of
the plan and (2) under certain circumstances may include a beneficiary trust. Eligible retirement
plans are qualified retirement plans, section 403(b) tax-sheltered annuities (TSAs), or eligible
state and local government plans – provided their terms allow such rollovers.
The nonspouse beneficiary continues as a beneficiary (and not the owner) of the recipient IRA.
Thus, the tax law treats the IRA as an inherited IRA (that the beneficiary must establish in the
name of the decedent). However, for a decedent dying after 2005, a nonspouse beneficiary may
be able to use the rollover to lengthen the required minimum distribution period, and thus
extend the tax deferral period for plan funds. More specifically, the beneficiary may be able to
lengthen the distribution period from a five-year period under the plan to an IRA period extending
over the beneficiary's life expectancy. To qualify, the plan must make its first annual minimum
distribution, and also consummate the rollover, before the end of the first full calendar year
following the decedent's death
See Chapters 2, 4, 5, and 8 of the treatise for more complete discussions of the taxation of IRA
and retirement plan distributions and the applicable required minimum distribution rules.
(Pension Protection Act of 2006, Pub. L. No. 109-280, § 829(a), (b); I.R.C. §§ 402(c)(11), 403(a)
(4)(b), 403(b)(8)(b), 457(e)(16))(B); Notice 2007-7, 2007-5 I.R.B. __.)
No Implied Election to Avoid Penalty for Failure to Make Required Distributions. – If a retiree
dies before his or her required beginning date, a plan or IRA that does not require use of the five-
year distribution rule must make minimum distributions to a designated beneficiary over the his
or her life expectancy, unless the beneficiary elects the five-year rule. If the beneficiary does not
explicitly elect the five-year rule, the life expectancy rule will apply even if the plan or IRA fails to
make timely distributions. However, the beneficiary must pay a 50 percent penalty tax on
required distributions not timely made. (Ltr. Rul. 200811028.)
Spouse or Former Spouse Taxed on QDRO Benefits. – A retiree is not liable for income tax or
gift tax on benefits paid to his or her spouse or former spouse under a QDRO. Rather the
spouse will pay income tax on the benefits. Neither the terms of a QDRO nor state community
property laws can change this result. However, distributions actually received by a retiree are
taxable to the retiree even if a court order requires the retiree to pay the distributed amounts over
to his or her spouse. (Mitchell v. Commissioner, 131 T.C. No. 15 (2008); Seidel v.
Commissioner, T.C. Memo 2005-67 (2005); Amarasinghe v. Commissioner. T.C. Memo 2007-
333 (2007), aff’d, 282 Fed. Appx. 228 (4th Cir. 2008).) See Chapters 2 and 4 of the treatise for an
explanation of QDROs.
Spousal Rollovers through a Trust. – A surviving spouse may roll over a qualified plan
distribution received through a trust tax-free if the terms of the trust provide the spouse with the
unconditional power to obtain the distributed funds. The spouse may roll over the plan funds
even if the plan administrator erroneously paid them over to the retiree’s estate rather than to
the trust over which the surviving spouse had unconditional power. (Ltr. Rul. 200905040.) See
Chapters 2, 4, 5, and 6 of the treatise for a discussion of tax-free rollovers by surviving spouses.
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Spouse’s IRA Ownership Election Significantly Impacts Retirement Plan Rollovers. – A
retiree's surviving spouse may roll over a distribution from the retiree's qualified retirement plan
into an IRA in which the spouse is the beneficiary – or alternatively into an IRA the spouse
“owns.” Depending on the spouse’s choice, the timing and amounts of required minimum
distributions from the IRA and the application of the 10 percent penalty tax on early distributions
will likely differ. (Ltr. Rul. 200450057.) See Chapters 5 and 8 of the treatise for discussions of
your spouse’s election to own your IRA.
Spousal Rollover to IRA Permitted after Another Beneficiary's Proper Disclaimer. – The tax
law treats a retiree's surviving spouse as the direct recipient of qualified retirement plan benefits
received because another beneficiary properly disclaimed them (i.e., legally renounced them).
Thus, the spouse may generally roll the benefits over tax-free to his or her own IRA. (Ltr. Rul.
200505030.) Further, the disclaimer is not invalid merely because the disclaimant received the
retiree's final required minimum distribution. Rev. Rul. 2005-36, 2005-26 I.R.B. 1368. See
Chapter 2 of the treatise for an explanation of tax-free rollovers from qualified retirement plans.
Rollovers to IRAs Allowed for Some Indirect Distributions to Surviving Spouses. – A
surviving spouse may generally roll over IRA distributions or qualified retirement plan
distributions passing to the spouse indirectly through a trust or estate – if the spouse has the
unconditional power to obtain the distributed funds. For example, a surviving spouse may
generally roll over a qualified plan distribution passing through the deceased spouse’s estate
where (i) the surviving spouse is the executor of the estate and (ii) the distribution must pass to
the surviving spouse as the only beneficiary. (Ltr. Rul. 200444032.)
Similarly, a surviving spouse may generally roll over an IRA or Roth IRA distribution passing
through the decedent’s trust where (i) the surviving spouse is the trustee and (ii) the trust
actually distributes the funds to the surviving spouse or his or her IRA. (Ltr. Rul. 200424011; Ltr.
Rul. 200742032.) See Chapters 2, 5, and 6 of the treatise for explanations of tax-free rollovers
from qualified retirement plans, IRAs, and Roth IRAs.
IRA Ownership Election by Surviving Spouse May Lengthen Children’s Tax Deferral. – A
retiree's surviving spouse and children may all be current beneficiaries of a “qualified” trust that
is in turn the beneficiary of the retiree's IRA. If so, the IRA may generally make required
minimum distributions over a period no longer than the life expectancy of the oldest beneficiary
(Normally the spouse).
However, the IRS has ruled such an IRA may spread minimum distributions to the children over
the longer life expectancy of the oldest child – if the surviving spouse transfers his or her share
to a separate IRA that the spouse elects to treat as his or her own. To achieve this longer tax
deferral for the children, the surviving spouse must make the transfer and ownership election
before September 30 of the year following the decedent’s death. (Ltr. Rul. 200449042 and
200449041.) See Chapter 8 of the treatise for an explanation of minimum distribution
requirements and Chapter 5 for spousal ownership elections.
QDRO Distributions Taxed to Spouse Regardless of Community Property Laws. – A
distribution from a retiree's qualified retirement plan to the retiree's spouse or former spouse
under a court’s “qualified domestic relations order” (a QDRO) is generally taxable to the
spouse. The Tax Court has held that community property laws of a state do not change this
result – i.e., do not make the distribution taxable to the retiree to the extent the spouse received it
under the QDRO. Seidel v. Commissioner, T.C. Memo 2005-67 (2005). See Chapter 2 of the
treatise for a discussion of QDROS under qualified retirement plans.
Indirect Plan Distributions for a Spouse Not Taxable to the Spouse. – A taxpayer’s spouse or
former spouse is not required to pay tax on an amount paid to him or her pursuant to a court’s
domestic relations order requiring the taxpayer to withdraw funds from a qualified retirement
plan and pay the funds over to him or her. Rather, the plan distribution is taxable to the
withdrawing taxpayer since such an indirect payment to a spouse cannot qualify as a payment
under a “qualified domestic relations order” (a QDRO). Amarasinghe v. Commissioner, T.C.
Memo 2007-333 (2007). See Chapter 2 of the treatise for a discussion of QDROS under
qualified retirement plans.
Optional Spousal Annuity in Lieu of Required Joint and Survivor Spousal Annuity. – Many if
not most qualified retirement plans are required to provide a retiree with an annuity payable for
the retiree’s lifetime and, after the retiree’s death, to his or her spouse for the spouse’s lifetime
(a “J&S annuity”). The amount of the annuity payment to the surviving spouse must be in the
range of 50 percent to 100 percent of the amount of the payments to the retiree during his or her
lifetime. The exact percentage is determined by the terms of the plan.
In the past, a retiree could generally waive the J&S annuity during the 90-day period ending on
the annuity starting date and instead choose another payment option. After 2006, the Pension
Protection Act allows 180 days for the waiver. Nevertheless, as in the past, the waiver is
generally not effective without the consent of the retiree’s spouse.
After 2007, qualified plans must generally offer an optional survivor’s annuity as an alternative to
a J&S annuity. As with the J&S annuity, the optional annuity is payable for the retiree’s lifetime
and, after the retiree’s death, to his or her spouse for the spouse’s lifetime. However, the
amounts of the annuity payments are different for the optional annuity.
If the J&S annuity provides the surviving spouse with annuity payments that are less than 75
percent of the payments to the retiree, the optional annuity must provide for payments to the
surviving spouse equal to 75 percent of the payments to the retiree. If the J&S annuity provides
the surviving spouse with payments that are 75 percent or more of the payments to the retiree,
the optional annuity must provide for payments to the surviving spouse equal to 50 percent of
the payments to the retiree.
Under either the J&S annuity or the optional annuity, the present value (discounted value) of the
expected future annuity payments to the retiree and surviving spouse must equal the present
value of a lifetime annuity otherwise payable to the retiree alone. The idea is that it should cost
approximately the same amount to purchase any of these annuities from a commercial issuer
of annuities. Thus, an increase in the surviving spouse’s payments under the optional annuity
will necessarily reduce the amount of the payments to the retiree during his or her lifetime, and
conversely, a decrease in the surviving spouse’s payments will increase the retiree’s payments.
See Chapter 2 of the treatise for a more complete discussion of spousal annuity requirements.
(Pension Protection Act of 2006, Pub. L. No. 109-280, § 1004(a), (c); I.R.C. § 417(a), (g).)
Rollovers by Nonspouse Beneficiaries from Decedents’ Retirement Plans to IRAs. – The tax
law has long allowed surviving spouses to roll over certain distributions tax-free from their
deceased spouses’ retirement plans to their own IRAs. Such rollovers may allow surviving
spouses to utilize methods of distribution not available for distributions from retirement plans.
Similarly, after 2006, a “designated beneficiary” who is not the decedent’s spouse may
authorize a tax-free trustee-to-trustee rollover from the decedent’s consenting “eligible
retirement plan” to a newly established IRA. For this purpose, a designated beneficiary (1) is
generally an individual specifically designated as a beneficiary by the governing instrument of
the plan and (2) under certain circumstances may include a beneficiary trust. Eligible retirement
plans are qualified retirement plans, section 403(b) tax-sheltered annuities (TSAs), or eligible
state and local government plans – provided their terms allow such rollovers.
The nonspouse beneficiary continues as a beneficiary (and not the owner) of the recipient IRA.
Thus, the tax law treats the IRA as an inherited IRA (that the beneficiary must establish in the
name of the decedent). However, for a decedent dying after 2005, a nonspouse beneficiary may
be able to use the rollover to lengthen the required minimum distribution period, and thus
extend the tax deferral period for plan funds. More specifically, the beneficiary may be able to
lengthen the distribution period from a five-year period under the plan to an IRA period extending
over the beneficiary's life expectancy. To qualify, the plan must make its first annual minimum
distribution, and also consummate the rollover, before the end of the first full calendar year
following the decedent's death
See Chapters 2, 4, 5, and 8 of the treatise for more complete discussions of the taxation of IRA
and retirement plan distributions and the applicable required minimum distribution rules.
(Pension Protection Act of 2006, Pub. L. No. 109-280, § 829(a), (b); I.R.C. §§ 402(c)(11), 403(a)
(4)(b), 403(b)(8)(b), 457(e)(16))(B); Notice 2007-7, 2007-5 I.R.B. __.)
No Implied Election to Avoid Penalty for Failure to Make Required Distributions. – If a retiree
dies before his or her required beginning date, a plan or IRA that does not require use of the five-
year distribution rule must make minimum distributions to a designated beneficiary over the his
or her life expectancy, unless the beneficiary elects the five-year rule. If the beneficiary does not
explicitly elect the five-year rule, the life expectancy rule will apply even if the plan or IRA fails to
make timely distributions. However, the beneficiary must pay a 50 percent penalty tax on
required distributions not timely made. (Ltr. Rul. 200811028.)
Spouse or Former Spouse Taxed on QDRO Benefits. – A retiree is not liable for income tax or
gift tax on benefits paid to his or her spouse or former spouse under a QDRO. Rather the
spouse will pay income tax on the benefits. Neither the terms of a QDRO nor state community
property laws can change this result. However, distributions actually received by a retiree are
taxable to the retiree even if a court order requires the retiree to pay the distributed amounts over
to his or her spouse. (Mitchell v. Commissioner, 131 T.C. No. 15 (2008); Seidel v.
Commissioner, T.C. Memo 2005-67 (2005); Amarasinghe v. Commissioner. T.C. Memo 2007-
333 (2007), aff’d, 282 Fed. Appx. 228 (4th Cir. 2008).) See Chapters 2 and 4 of the treatise for an
explanation of QDROs.
Spousal Rollovers through a Trust. – A surviving spouse may roll over a qualified plan
distribution received through a trust tax-free if the terms of the trust provide the spouse with the
unconditional power to obtain the distributed funds. The spouse may roll over the plan funds
even if the plan administrator erroneously paid them over to the retiree’s estate rather than to
the trust over which the surviving spouse had unconditional power. (Ltr. Rul. 200905040.) See
Chapters 2, 4, 5, and 6 of the treatise for a discussion of tax-free rollovers by surviving spouses.
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| Copyright © 2005-2009 by Vorris J. Blankenship All Rights Reserved |
The author intends that this website provide accurate and authoritative information on the subject matter
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
Key Tax Developments Affecting Retirees
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