Clients and even attorneys are often confused by “rollovers” and for good reason. So, just exactly what does a “rollover” mean?
A rollover is essentially moving the funds from one investment vehicle to another, from your 401(k) or ERISA plan to an IRA for example. There are a number of reasons you might choose to rollover your funds, but the most common is to take advantage of greater investment options.
Upon your death, your surviving spouse can do a “spousal rollover” to his or her own IRA. A non-spouse beneficiary would have to use his or her own single-life expectancy to determine the minimum required distributions. For example, someone age 50 would have a life expectancy of 34.2 years. Thus, they would need to draw 1/34.2th of the trust the first year of distributions. However, if the surviving spouse does a spousal rollover, the funds are treated as the spouse’s own contributions. There are no minimum required distributions until after achieving age 70 ½. Also, once they start taking distributions, the spouse can use the uniform table, which allows for lower required distributions than the single-life tables. For example, the divisor used to determine minimum required distributions for a 70-year old is 27.4 under the uniform table while only 17.0 under the single-life table.
For a surviving spouse under age 59 ½, particular care should be given to whether or not to do a spousal rollover. While a spousal rollover will allow for greater deferral, withdrawals prior to age 59 ½ are subject to early withdrawal penalties. On the other hand, there are no early withdrawal penalties for an inherited IRA, even if inherited by the spouse.
Another “rollover” often discussed is the “non-spousal” rollover. The Pension Protection Act said that plans must allow a non-spouse beneficiary to do a non-spousal rollover to an IRA. However, in a Notice, the IRS said that plans were not required to do so and that they were interpreting the new statute as merely allowing such non-spousal rollovers. Section 108(f)(2)(A) of the Worker, Retiree, and Employer Recovery Act (WRERA) of 2008 amended code section 402(f)(2)(A) to make such provisions mandatory for plan years beginning Jan. 1, 2009. This can be important since qualified plan may have faster distribution requirements than required by law.
One “rollover” is not necessarily just like another “rollover.” Thus, when someone discusses a rollover, ask which kind of “rollover” they mean.
Steve Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.