Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

accordingly could be “rolled” without necessarily rolling the noninsurance portion of the death benefit; even better, it may be possible to “segregate” the pre- and after-tax portions of the insurance proceeds and roll them to different destinations (see ¶ 2.2.05 ). So can the insurance proceeds be rolled to a Roth IRA just like any other death benefits inherited by the surviving spouse or other designated beneficiary? An eligible rollover distribution is a permitted contribution to an IRA. What is an eligible rollover distribution? At one time, distributions that were not includible in gross income could not be rolled over; now (with some limitations) they generally can be. § 402(c)(1) , (2) . Otherwise, an “eligible rollover distribution” is ANY distribution except a distribution that is part of a series of equal payments, a hardship distribution, or a required distribution (under § 401(a)(9) . § 402(c)(3) . The regulations don’t add much to this picture. The following is from Reg. § 1.402(c)-2 : “A-3. (a) General rule. Unless specifically excluded, an eligible rollover distribution means any distribution to an employee (or to a spousal distributee described in Q&A-12(a) of this section) of all or any portion of the balance to the credit of the employee in a qualified plan. Thus, except as specifically provided in Q&A-4(b) of this section, any amount distributed to an employee (or such a spousal distributee) from a qualified plan is an eligible rollover distribution...” A-3(b) then lists the exceptions—distributions that are NOT eligible for rollover, including generally after-tax money, but A-3(b) was written before the Code was amended to specifically allow rollovers of after-tax money, so that limitation is now nugatory. A-4 lists more exceptions (distributions that are not eligible for rollover), but none of them has any relation to the life insurance question. Reg. § 1.402(c)-2 , A-12(a), dealing with spousal rollovers, seems to bless the rollover of insurance proceeds if such are considered ancillary death benefits: “ Spousal distributee . If any distribution attributable to an employee is paid to the employee’s surviving spouse, section 402(c) applies to the distribution in the same manner as if the spouse were the employee. The same rule applies if any distribution attributable to an employee is paid in accordance with a qualified domestic relations order (as defined in section 414(p)) to the employee’s spouse or former spouse who is an alternate payee. Therefore, a distribution to the surviving spouse of an employee ...including a distribution of ancillary death benefits attributable to the employee, is an eligible rollover distribution if it meets the requirements of section 402(c)(2) and (4) and Q&A-3 through Q&A-10 and Q&A-14 of this section.” The phrase “including a distribution of ancillary death benefits attributable to the employee” would seem to preclude any argument by the IRS that life insurance proceeds are somehow not part of “the balance to the credit of the employee in a qualified plan” that a spouse is entitled to roll over. This trail would lead us to believe that a surviving spouse (and a nonspouse designated beneficiary, using the direct rollover) can roll over to the spouse’s own Roth IRA (or to an inherited Roth IRA in the case of a nonspouse designated beneficiary) proceeds of insurance on the life of the deceased employee, even though a significant portion of such proceeds is income tax free. The caveat is that, at the time Reg. § 1.402(c)-2 , A-12(a) was first issued (1995), the Roth conversion/rollover of income tax-free life insurance proceeds was not on the radar screen at all for several reasons, namely: there was no such thing as a Roth IRA, nontaxable distributions were not eligible for rollover, and there was no such thing as a nonspouse beneficiary rollover. However,