Spouse Beneficiary — “Stretch IRA” Concept
Rev. 03/26/04, E-mail Alert 2004-7

If a participant in a qualified plan dies after his or her required beginning date for distributions and the surviving spouse is the sole primary beneficiary, that spouse is faced with the issue of whether to continue taking distributions from the qualified plan or to roll the funds over to the surviving spouse's IRA (or the spouse's own qualified plan). The decision can have long-term tax consequences for the beneficiaries named by the surviving spouse.
The spouse beneficiary has the option of taking minimum distributions from the qualified plan over his or her single life expectancy. Even though the assets are being distributed from the participant's qualified plan, the surviving spouse may name his or her own beneficiaries. In such a case, when the surviving spouse dies, the longest distribution period available to the beneficiaries is the surviving spouse's life expectancy in the year of death, reduced by one for each year that elapses.

If, however, the spouse had rolled the assets into his or her own IRA and named their own beneficiary(ies) to the IRA, and then died, the beneficiary(ies) would be able to establish a life expectancy payout based on the new beneficiary's own life expectancy. This effectively “stretches” the period of time over which the payments may be made to that beneficiary.

Example:
Harry Burns has been a participant in a qualified retirement plan and has been receiving minimum distributions since age 70½. Harry passes on at the age of 85. His surviving spouse, Sally Albright-Burns, age 84, decides to take distributions from his qualified plan and also names her son, Scott, as her beneficiary. Sally dies two years later at age 86. Scott was age 50 at the time of his mother's death. Scott must continue to take payments based upon the remaining life expectancy of his mother (7.1 years). If Sally had decided to roll the money over into her own IRA and named Scott as her IRA beneficiary, instead of having taken distributions from the qualified plan, then Scott would have been able to use his own life expectancy (34.2 years) to determine the payout period going forward. Finally, if Harry had not met Sally, we wouldn't have had all this fun.

Notes:
Remember that the minimum required distribution for the year of death may not be rolled over by the spouse.

The rules for those who die before their required beginning date are different. This article only addresses the scenario in which the participant was beyond the required beginning date (RBD) for distributions at the time of death.

If the surviving spouse is a participant in a qualified plan, he or she may roll his or her deceased spouse's qualified plan assets into his or her own qualified plan and treat it as part of his or her own assets.

Bill Grossman, Bob Kaplan and Steve Oberndorf