Surviving Spouse Can Roll Over Retirement Plan Left to Deceased Spouses Estate

A  is the surviving spouse of B, a participant in Plan X, qualified under Sec. 401(a). B designated his estate as the sole beneficiary of any pre-retirement death benefit payable under Plan X.

B executed a will naming A the sole executrix and beneficiary of Bs estate, then died before reaching his required beginning date under Sec. 401(a)(9)(C). Subsequently, X issued a check payable to A, as executrix of the estate, representing the pre-retirement death benefit, less 10% withheld as Federal income tax. No other benefit distributions have been made or are payable from X.

As executrix, A caused the pre-retirement death benefit to be distributed to her by depositing Xs check into her personal bank account. On April 11, 2003, A contributed the amount of the check, plus an amount equal to the withheld Federal income tax, into her IRA.

Analysis

Under Sec. 402(c)(1), any portion of an eligible rollover distribution from a qualified Sec. 401(a) retirement plan transferred into an eligible retirement plan is not includible in gross income in the tax year paid. Sec. 402(c)(4)  generally defines eligible rollover distribution as any distribution to an employee of all or any portion of the balance to the credit of an employee. Regs. Sec. 1.402(c)-2, Q&A-11, states that withheld income tax is deemed an amount distributed under Sec. 402(c); thus, the amount withheld can be contributed as a rollover to an eligible retirement plan in addition to the net amount of the eligible rollover distribution.

Under Sec. 402(c)(9), these rules apply to a distribution paid to an employees spouse after the employees death, in the same manner as if the spouse were the employee. Thus, a distribution to the employees surviving spouse is an eligible rollover distribution if it meets Sec. 402(c)(2) and (4).

In general, if a decedents qualified plan assets pass through a third party (e.g., an estate or a trust) and then are distributed to the decedents surviving spouse, said spouse will be treated as acquiring them from the third party and not from the decedent. Thus, generally, the surviving spouse will not be eligible to roll over the qualified plan proceeds into his or her own IRA.

In this case, however, A, as the sole beneficiary and sole executrix of Bs estate, caused X to issue a check representing the pre-retirement death benefit payable to A as executrix. A caused the pre-retirement death benefit to be distributed to her, by depositing the check in her personal account. A then contributed the amount of the check, plus an amount equal to the portion withheld as Federal income tax, into an IRA established and maintained in As name. The contribution occurred within 60 days of the X distribution to A. Thus, all actions necessary to accomplish the rollover have been carried out by, and at, As behest. Under these circumstances, the Service treats A, Bs surviving spouse, as having acquired the X proceeds directly from B and not from his estate.

Thus, A qualifies as a spouse under Sec. 402(c)(9) and is eligible to roll over the pre-retirement death benefit to her IRA, assuming the distribution otherwise qualifies. As provided in Sec. 1.402(c)-2, Q&A-11, A may also roll over an amount equal to the income tax withheld. Because the entire pre-retirement death benefit (including the withheld amount) has been timely contributed an IRA, no portion of the pre-retirement death benefit is taxable in the year of distribution from X.

IRS Letter Ruling 200344024 (10/31/03)

REFLECTIONS: In Letter Ruling 200304038 (1/24/03), the Service allowed a surviving spouse to roll over a deceased spouses IRA from the estate when the estate was the designated IRA beneficiary, but the spouse was the estates personal representative and sole beneficiary under state intestacy laws. Also, in Letter Ruling 200304037 (1/24/03), the surviving spouse was allowed to roll over the deceased spouses IRA through a jointly created inter vivos trust and survivors subtrust; the Service noted that the actions constituted an election to treat the IRA as the surviving spouses IRA (see Tax Trends, Surviving Spouse Can Roll Over IRA Proceeds Received From Trust, TTA, April 2003).