Transfer between spouses
Taxpayer was going to a nursing home and told he had to transfer his IRA to his wife so he could qualify for medicaid. He did ( $33,000 +). He received a 1099-R for the transfer and someone told him they may qualify for tax relief under the “impoverished spouse rule”. Any suggestions?
Permalink Submitted by Jose Morales on Mon, 2013-04-08 16:35
There are only two circumstances under which an IRA can be transferred from one person to another. Those are either the death of the IRA owner with a spouse named as beneficiary, or a divorce in which a court orders a tranfer incident to divorce. Whoever told him to transfer the IRA to his wife gave him very bad advice, as this cannot be done by him simply closing the account out and giving the funds to the wife. If she deposited these funds into an IRA in her own name this would be an ineligible rollover and depending on her age could be an excess contribution subject to 6% tax penalty itself.
Permalink Submitted by Alan - IRA critic on Mon, 2013-04-08 18:37
I agree with urusei2 except that the 6% excise tax for an excess contribution will apply regardless of her age. It would be interesting to note exactly what he did since the 1099R suggests he took a taxable distribution, although that would likely be offest by the medical deduction for nursing home costs.
Permalink Submitted by Peter Bratlie on Tue, 2013-04-09 12:46
The nursing home costs were covered by Medicaid, so he had no out of pocket medical expenses due to the nursing home cost.
Permalink Submitted by Alan - IRA critic on Tue, 2013-04-09 16:29
However, if Medicaid discovers a disallowed transfer of his IRA funds, they may recover their payments.
Permalink Submitted by Jose Morales on Tue, 2013-04-09 23:33
You are most likely correct Alan, and it is probably safe to assume that the spouse is over 70 1/2 as well and therefore the entire ineligible rollover would be an excess contribution, but I’ve seen enough clients with spouses much younger than themselves to not assume with no other information. If they had no earned income at the time it would also make the spouse unable to characterize at least a portion of the ineligible rollover as a contribution.