Non Spouse Beneficiaries –
Mandatory Withholding Required

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January 2010

Dear Partner Name,

Effective on January 1, 2007, as part of the Pension Protection Act, the qualified prototype plan documents (Individual 401(k), Profit Sharing and Money Purchase Pension) supported by Principal Trust Company were amended to permit a non-spouse beneficiary to roll over retirement funds directly to an inherited Individual Retirement Account (IRA).

The Internal Revenue Service interpreted this change in law so that the distribution was not subject to the normal direct rollover requirements which include notifying participants of their rollover rights through a §402(f) Notice and mandatory 20% withholding if the assets are distributed in a cash distribution and not rolled over to an inherited IRA. Therefore, these distributions continued to be subject to federal income tax withholding at the 10% rate unless the participant elected out of the federal withholding.

As amended by the Worker, Retiree, and Employer Recovery Act of 2008, beginning in 2010, all qualified retirement plans must permit non-spouse beneficiaries to directly roll over retirement funds to an inherited IRA. At the same time, the rollover is now subject to the same rules as other eligible rollover distributions including the §402(f) Notice and the mandatory 20% federal withholding requirement.

Please ensure you and your clients are aware of these new withholding requirements.

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that Principal Trust Company is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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