Expert: Allen - 10/13/2008

Question
QUESTION: My father passed away earlier this year, and was not married at the time of his death.  I am his only child.  He has a pension fund and a supplemental pension fund, but named no beneficiary. A plan administrator informed me that I am not entitled to the monies in his pension fund because I am not the spouse, nor was he vested at the time of his death in accordance with the plan's rules. I am, however, entitled to the funds in a supplemental pension plan. My plan was to transfer the funds directly to my 401a plan to avoid penalties/taxes, but I was told I have to open an inherited IRA instead or they will not release a check to me.  Please explain this type of IRA and what my other options are, if any. Thank you.

ANSWER: The rules depend on your father's age. What was his date of birth?

---------- FOLLOW-UP ----------

QUESTION: He was born in July 1945.

Answer
I believe the plan administrator is correct regarding the transfer to an inherited IRA.

In all respects  except one, an inherited IRA is like any other IRA. It can be established at a financial institution. The main difference between an inherited IRA and a regular IRA is the timing of distributions from the IRA. Since your father was not 70 1/2 when he died, you have two choices.
1. You can distribute the money at any time between the time the account is established and 12/31/13. The amount received will be subject to income tax as it is received. You can take it all in one year or spread it out over the years. The account value must be 0 at the end of 2013.

2. You can take annual distributions beginning in 2009. These distributions will be made based on a table published by the IRS. The amount received each year is a specific amount.
If you take the first distribution during 2009, the amount paid to you is the value of the inherirted IRA on 12/31/08 divided by the life expectancy factor from the IRS table. The distribution in 2010 is the amount in the account on 12/31/09 divided by the life expectancy factor - 1. The distribution in 2011 is the amount in the IRA on 12/31/10 divided by the life expectancy factor -2. For example if the account value on 12/31/08 is $100,000 and your life expectancy factor is 40, then the amount withdrawn in 2009 is 100,000 divided by 40. If the value 12/31/09 was $95,000, then the amount withdrawn in 2010 is $95,000 divided by 39. If the value on 12/31/10 is $105,000, the amount withdrawn in 2011 is $105,000 divided by 38. You would continue to take distributions each year for a total of 40 years. The distributions would be subject to income tax.