Hello:

I have a client who passed away, and the spouse would like to do a spousal rollover for a trad IRA (invested in a variable annuity) (and also has a Roth IRA the same way). In this case, the spouse would get stepped up DB resulting from a death benefit from the IRA annuity, BUT the company will NOT allow the beneficiary to do spousal continuation if he wants to get the step up now (he’s have to await his death if he didnt cash out the deceased’s IRA). Another advisor , who is a veteran, said his belief based on what he had been advised by a CPA about 1 1/2 yrs ago is that if the beneficiary merely cashed out the IRA of the deceased and put the funds in the beneficary spouse’s respective trad and roth IRAs, that this would not stand up if the beneficiary was audited by the IRS. My position is that although this will generate a 1099 R for the deceased as a result of the indirectness (IE taking a ck, cashing it & roling over the exact amount into the beneficiary’s respective Trad and Roth IRAs with the ck noted “Spousal rollover” (while keeping copies of the check written as well as the deceased spouse’s confirmation of the corresponding fund close outs) that one could fill out the 5329 form to explain that this is a spousal rollover and shouldnt be subject to income taxes (and that the Roth is being rolled over into the Spouse’s Roth), as well as the client receiving and keeping a 5498 form that should be generated by the company where the funds are being rolled into. Am I correct? Or is my friend’s “warning” accurate rather than just based on fear and an incorrect CPA? Was I correct in the proper documentation in case there ever is an audit, to produce a trail?