Capture Larger Share of Rollover Market From Beneficiary Rollovers

When first notified that they’ve inherited retirement plan assets, many individuals are tempted to take the money and run. But it may be in their best interest to keep the money in a tax-deferred savings account, like an IRA or inherited IRA.

It also may be in the financial organization’s best interest. Accepting rollovers of inherited retirement plan assets is a great way to grow IRA business. Financial organizations interested in capturing a larger share of the rollover market should encourage rollover contributions from employer-sponsored retirement plans—including beneficiary rollovers—throughout the year.

Beneficiary Rollover Benefits

Any marketing efforts to capturing beneficiary rollover assets should stress these tax benefits of rolling over inherited retirement plan assets to an IRA.

Assets remain tax deferred if rolled over to a Traditional IRA.
Spouse beneficiaries retain the option to roll over pretax assets back into a retirement plan in the future.
Beneficiaries may be in a lower tax bracket when they distribute assets in the future.
Beneficiaries may experience a higher level of service from a financial organization than from a plan administrator.

Conflict-of-Interest Rule

The Department of Labor’s (DOL’s) “conflict-of-interest” rule—intended to protect retirement savers from investment and account management advice that is not in their best interest— generally is now effective (with full implementation on July 1, 2019). Thus, financial organizations should exercise caution when communicating options for beneficiary retirement plan rollovers. If an organization’s objective is to affirmatively attract rollovers, rather than simply accept them on a random basis, it should consider the DOL’s best interest contract (BIC) exemption, which goes into full effectiveness July 1, 2019. The BIC is a written agreement between the financial organization and the client, disclosing any potential conflicts of interest and providing assurance that safeguards are in place to ensure that the organization and its employees will meet impartial conduct standards.

General communications, such as newsletters, marketing materials, public presentations, and other nonpersonal communications, generally will not be considered fiduciary advice.

(See The Link article "How the New DOL Fiduciary Rule Applies to IRAs and HSAs" for more on the conflict-of-interest rule.)

Spouse Beneficiary Rollovers

To be successful in the rollover market, IRA administrators should have a general understanding of the spouse and nonspouse beneficiary rollover requirements. If a plan participant’s surviving spouse beneficiary receives an eligible rollover distribution from a plan, the rollover rules apply as if the surviving spouse were the participant, with no restrictions. Consequently, the surviving spouse may roll over the assets to an IRA or to another eligible retirement plan.

Spouse beneficiaries may roll over inherited assets to their own IRAs or to inherited IRAs. If rolling over inherited pretax assets to a Roth IRA, the pretax assets will be taxable. If rolled to a Traditional IRA, the pretax assets remain tax-deferred. The following chart summarizes spouse beneficiary rollover options.

NOTE: Spouse beneficiaries who inherit designated Roth account assets from the retirement plan (e.g., Roth 401(k) assets) may roll over those assets to their own retirement plan designated Roth accounts, Roth IRAs, or inherited Roth IRAs.

Nonspouse Beneficiary Rollovers

Employers operating qualified retirement plans (QRPs), 403(b) plans, or governmental 457(b) plans must offer nonspouse beneficiaries the option to directly roll over eligible inherited plan assets to inherited Traditional and Roth IRAs. The following requirements apply.

A nonspouse beneficiary may not take a distribution and indirectly roll it over to an inherited IRA.
A nonspouse beneficiary may not roll over inherited retirement plan assets to other retirement plans.
A nonspouse beneficiary may not roll over an undistributed RMD or life expectancy payment.
The inherited IRA must identify both the deceased plan participant and the beneficiary (e.g., “Tom Smith as beneficiary of John Smith”).
Rollovers of inherited pretax assets to an inherited Roth IRA are taxable for the year they are rolled over.
If a nonspouse beneficiary is subject to the five-year rule under the plan—distributing the entire amount by the end of the year containing the fifth anniversary death—the entire amount of the inheritance is eligible to be rolled over within the first four years following the year of death. Any assets remaining in the account on January 1 of the fifth year are ineligible for rollover.

The following chart summarizes the nonspouse beneficiary rollover options.

NOTE: Nonspouse beneficiaries who inherit retirement plan designated Roth account assets may roll over those assets to inherited Roth IRAs.

Distributions From Inherited IRAs

Spouse and nonspouse beneficiaries who roll over inherited retirement plan assets to an inherited IRA must take beneficiary distributions from the inherited IRA. The payment method could be either the five-year rule or annual life expectancy payments generally begun by the end of the year after the year of the rollover. For distributions out of the inherited IRA, the payment method typically is based on the method that applied under the retirement plan, either as dictated by plan provisions or by the participant or beneficiary election.

If the five-year rule applied under the plan before the rollover, the five-year rule generally applies under the inherited IRA. If single life expectancy payments applied under the plan, the payments must continue under the IRA using the same distribution period that would have applied under the plan had the rollover not occurred. For example, beneficiaries must use the same life expectancy that they would have used under the plan to calculate life expectancy payments.

Beneficiaries who are subject to the five-year rule under the retirement plan, however, may switch to the life expectancy payment method. If making this switch, the beneficiary must distribute that year’s life expectancy payment from the plan and roll over the remaining balance to an inherited IRA before December 31 of the year following the death year, and must continue taking annual life expectancy payments from the IRA.