Planning opportunity for surviving spouse who is beneficiary of IRA and qualified plan.

• Author: Elinsky. Peter I.

Letter Ruling 9608042 describes the tax consequences of a surviving spouse's electing to roll over a lump-sum distribution from her deceased husband's qualified plan to his individual retirement account (IRA)-and not electing to treat the husband's IRA as her own.

Facts

At the time of his death, Husband was both a participant in a qualified money purchase pension plan and an owner of an IRA, and had not begun receiving distributions from either; Wife was the sole beneficiary of both the qualified plan and the IRA. Wife intends to direct the plan's trustee to transfer Husband's account balance from the plan (which permits single-sum distributions) to his IRA in a trustee-to-trustee transfer. Wife does not intend to treat the IRA as her own. She is under age 59%, and intends to begin taking distributions from the IRA immediately.

No Tax on Direct Rollover

Sec. 402(c) (1) states that if any portion of an eligible rollover distribution from a qualified plan is transferred into an eligible retirement plan, the portion transferred is not includible in gross income in the year paid. Under Sec. 402 (c) (9), if a distribution attributable to an employee is paid to the employee's spouse after the employee's death, Sec. 402(c) applies to the distribution just as if the spouse were the employee, except that the spouse can transfer the distribution only to an IRA or individual retirement annuity.

In Letter Ruling 9608042, the IRS first noted that under proposed regulations, Wife may elect to treat Husband's IRA as her own--but that rolling over a distribution from Husband's qualified plan into an IRA will not, by itself, constitute an election to treat the IRA as her own. Thus, Husband's IRA would continue to be maintained in Husband's name, because Wife will not affirmatively elect to treat the IRA as her own. The IRS concluded, however, that the transaction will still fall within the scope of Sec. 402 (c) (9). Thus, the distribution from Husband's qualified plan to his IRA is excludible from Wife's income as a direct rollover from a qualified plan to an IRA under Secs. 402(c) (9) and 401 (a) (31).

No Excess Contributions Excise Tax

The Code imposes for each tax year a 6% excise tax on the amount of excess contributions to an IRA. The amount of excess contributions generally is the excess of contributions for the year over the amount allowable as a deduction under Sec. 219. But in calculating excess contributions, rollover amounts are not taken into...