Surviving spouse can roll over retirement plan left to deceased spouse's estate.

• Author: O'Driscoll, David

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 B's 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 X's 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 employee's spouse after the employee's death, in the same manner as if the spouse were the employee. Thus, a distribution to the employee's surviving spouse is an eligible rollover distribution if it meets Sec. 402(c)(2) and (4).

In general, if a decedent's qualified plan assets pass through a third party (e.g., an estate or a trust) and then are distributed to the decedent's 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 B's estate, caused X to issue...