Stretching out your Retirement Plan

What happens to a retirement account or IRA after the participant's death? The capital gain (profit) in most assets is forgiven when the owner dies because the inheritor receiving a new cost or basis equal to the value of the asset on the old owner's death. (IRC§ 1014). But gain is not forgiven for retirement plan assets or IRA assets. (IRC§ 691).  A participant can designate who receives his or her retirement plan/IRA proceeds  at death by signing a beneficiary designation form. Treasury Regulation 1.401(a)(9)-4  prescribes how distributions may be taken by the beneficiary after the participant's  death. This is important because the longer the allowable period over which  distributions can be taken, the longer the assets can continue to build up on a tax  deferred basis.

When a qualified trust is designated as beneficiary, distribution can be taken over  the life expectancy of the oldest beneficiary (in many cases the oldest child). But some retirement plans do not allow for this stretch out, instead mandating distribution to be taken over a much shorter period. A qualified trust (or a non-spouse individual who has been named as beneficiary) now has another choice. The beneficiary can direct that the plan proceeds be transferred directly to an IRA in the name of the now deceased participant. This is different from a roll-over by a spouse because when the participant dies the roll-over goes into an IRA of the spouse.

Non-spouse beneficiaries who direct the distribution of assets of a retirement plan to an IRA in the name of the deceased person effectively remove assets from a plan where there may be little or no stretch out available to a plan where the full stretch out can be facilitated. This is true whether the non-spouse beneficiary is an individual or  a qualified trust.

Randy Spiro is a Beverly Hills attorney who is a certified specialist in Taxation and in Estate Planning, Probate and Trust Law. He holds a Masters Degree in Taxation from Golden Gate University and has taught tax and estate planning courses at UCLA and USC.  He has been named as Super Lawyer by Los Angeles Magazine.