Lump Sum Death Benefit
The benefit is subject to federal income tax, except that portion attributable to previously taxed IMRF member contributions. Certain beneficiaries may be allowed to choose ”forward averaging” to compute the tax.
Surviving spouses may roll over the taxable amount into a traditional IRA , Roth IRA, qualified plan, 457 or 403(b) plan . Beneficiaries who are not a member’s spouse may also roll over the taxable amount into an IRA. However, the IRS treats the IRA as an ”inherited IRA” and special distribution rules will apply.
A rollover into a Roth IRA is taxable to the beneficiary in the year the rollover is made.
IMRF is required by federal tax law to withhold 20% of the taxable portion of the lump sum benefit paid. The beneficiary can avoid the 20% withholding by electing to have the taxable portion directly transferred to an account as a qualifying rollover.
The non-taxable portion may be rolled over into an IRA (spouse or non-spouse beneficiary) or a qualified plan (spouse). (IMRF Form entitled, "Distribution/Rollover Certification.")
To access this form, visit the Employer Access area on IMRF’s website (www.imrf.org).
A beneficiary who does not ask for a direct rollover has 60 days after receipt to make a rollover to a traditional IRA, qualified plan, 457 or 403(b) plan, as provided by section 402(c) of the Internal Revenue Code.
To be eligible for a rollover, a non-spouse beneficiary must ask for a direct transfer to an IRA.
If a beneficiary is entitled to use 10-year averaging to limit tax liability, this option should be weighed against the rollover option.
Lump Sum Death Benefit Taken In Monthly Installments (Beneficiary Annuity)
The monthly payments are subject to federal income tax, but not that portion attributable to the deceased’s previously taxed IMRF member contributions .
The amount of the monthly payment not subject to federal taxes varies depending upon the amount of the deceased’s previously taxed IMRF member contributions and the age of the beneficiary.
The taxable amount of each annuity payment is computed using the same basic formula as retirement pensions.
Surviving Spouse Pension plus $3,000
The $3,000 death benefit is a taxable distribution. However, the surviving spouse can consider two options: having the $3,000 made payable to the spouse or rolling it over into a traditional (not a Roth) IRA, Roth IRA, qualified plan, 457 or 403(b) plan. If the $3,000 is rolled, IMRF will report a taxable amount of $0.
The surviving spouse pension is subject to federal income tax but not that portion attributable to the deceased’s previously taxed IMRF member contributions.
Return of IMRF Member Contributions and Interest
Returned previously taxed IMRF member contributions are not subject to federal income tax but 414(h) tax-deferred member contributions and the interest are taxable.
Surviving Spouse Annuity
The income tax treatment is the same as that described in subparagraph 1(c) above.
Surviving Spouse Pension
The surviving spouse pension is subject to the same federal income tax treatment as the IMRF retired member’s pension. The spouse may exclude from income the same dollar amount or percentage of each pension payment that the IMRF member was allowed to exclude until all previously taxed member contributions have been recovered.
When all the previously taxed contributions have been recovered, the entire pension will be subject to federal income tax. IMRF will inform the spouse when the pension becomes taxable.
Special Needs (Reversionary) Annuity
The Special Needs (reversionary) annuity (see 5.20 B. 15 b. Reversionary Annuity) income tax treatment is the same as described in 3(a) above.
Return of Unused Contributions
If the deceased retired member left no surviving spouse eligible for a surviving spouse pension, IMRF pays to the beneficiary the excess of the member’s contributions with interest (less any benefit prepayment) to date of retirement over the pension payments made to the date of death.
The beneficiary receiving this payment may take a tax deduction equal to the amount of unrecovered previously taxed IMRF member contributions.