Death or Disability
Death triggers a retirement plan distribution to the beneficiary (make sure this is up-to-date, or it will go to your probatable estate).
- If this is a pension, a lifetime annuity for the spouse may be created, if it wasn’t waived by the deceased (this is a Qualified Preretirement Survivor Annuity, or QPSA)
With disability, it triggers a retirement plan distribution to the participant.
Qualified Domestic Relations Order (QDROs)
Now what happens in a divorce? Depending on the divorce settlement (a Qualified Domestic Relations Order, or QDRO), either a portion of the retirement fund goes to the now-ex spouse, or to a common child.
In the first scenario, the spouse would receive the full lump sum distribution of her portion (usually 50%). She would be subject to ordinary income on that amount, but she would not be subject to the 10% early withdrawal penalty if she’s under 59.5 years old. However, it is still pragmatic to roll this over to an IRA and defer taxation if the amount is substantial.
In the second scenario, if the beneficiary is the common child, the child will receive the lump sum with no tax liability (or 10% penalty). However, the participant parent would be the one to pay the taxes. In certain cases, this may be a good way to settle. Again, case-by-case basis.
Spousal and Non-Spousal Beneficiaries After Death
If death occurs, and the spouse is a beneficiary, the surviving spouse can either continue distributions based on the deceased spouse’s schedule for RMD’s, or roll it over into an IRA in her own name, and delay distributions till then.
If a non-spouse is a beneficiary, there are different rules when it comes to Required Minimum Distributions. Either the amount is distributed within 5 years, or it can be “stretched” across the life expectancy of the beneficiary. There is a huge advantage in an 18 year old being the beneficiary, for example. Though there will be RMD’s every year, it will be minimal because of the 18 year old beneficiary’s long life expectancy.