Older Spouse Inherits TIRA

Submitted by Mhotchkiss on Mon, 2014-11-03 21:54

Facts
Husband died 6/2013 at age 60.
Wife inherits husband’s TIRA and is 65.

In order to delay RMDs the longest, she will maintain beneficial interest until his age 70.
In the meantime, she will be converting her own TIRA between age 65 and age 70, to eliminate RMDs on her own TIRA.

Once she turns age 70, her TIRA balance will be zero.

She then wants to start taking distributions from the inherited IRA and rollover to her own IRA and immediately convert to her own Roth IRA. She would like to do this until the inherited IRA balance is zero at his age 70.

Q – given that her 12/31 value at age 70 will be zero, what effect will taking money from the inherited IRA and rolling into her own TIRA followed by immediate conversion have with respect to RMDs? It seems like her TIRA would have an RMD, but the 12/31 balance was zero.

Q – once she begins making withdrawals from the inherited IRA to rollover to her own TIRA, are there any unintentional results? Does this meet the definition of “Treating it as her own” and subjecting it to RMDs?



Submitted by Alan - IRA critic on Tue, 2014-11-04 16:23

Q 1 – When a surviving spouse rolls over an inherited IRA to her own IRA in any year AFTER the year of death, she is deemed to have owned the IRA the entire year. While the IRS Regs are less than clear regarding the lack of a FMV on the prior 12/31, the following Q 7 of IRS Reg 1.408-8 appears to require an owned IRA RMD using the value of the inherited IRA on 12/31 of the prior year:

Q-7. What rules apply in the case of a rollover to an IRA of an amountdistributed by a qualified plan or another IRA?A-7. If the surviving spouse of an employee rolls over a distribution from aqualified plan, such surviving spouse may elect to treat the IRA as the spouse’s own IRA in accordance with the provisions in A-5 of this section. In the event of any other rollover to an IRA of an amount distributed by a qualified plan or another IRA, the rules in§1.401(a)(9)-7 will apply for purposes of determining the account balance for thereceiving IRA and the required minimum distribution from the receiving IRA. 

The verbiage “in the event of any other rollover” implies that the spousal rollover is unique in this respect, since the change from beneficiary to owner is unique in that this cannot occur in qualified plans under Sec 401(a)(9), only in IRAs. Therefore, where you indicate that her TIRA would have an RMD for the rollover year if she is 70.5, you are correct. Q2- No unintential consequences of doing the rollover, but there would be if she did not roll it over. Her RMDS as beneficiary would be higher and her successor beneficiary would not get their own stretch if she passed after reaching her 70.5 year. It is best that the rollover be completed before she enters her 70.5 year.

Submitted by [email protected] on Tue, 2014-11-04 21:58

Can you clarify the part about rolling over the inherited IRA to her own?  Is it possible to take a distribution from the inherited IRA and then roll that over in 60 days to her own IRA WITHOUT causing the remainder of the inherited IRA from being considered her own from then forward?  What we’re trying to do is maintain the inherited IRA as long as possible to avoid RMDs while converting it to her own Roth IRA AFTER she has converted her own TIRA prior to her age 70.5.  For example, she converts all her own TIRA by age 70.5 in 2019.  12/31/2019 value equals zero.  She then takes a distribution from her inherited IRA in 2020, not the whole thing, just enough to convert at the optimum rate, and rolls it into her own TIRA, then converts to Roth in 2020.  Again, 12/31/2020 TIRA balance is zero.   Because her deceased husband would still not have turned 70.5 yet, there’s no RMD on the inherited IRA and she has no balance on her own IRA to have an RMD required.  (You may have answered this above, but wanted to be clear on the question) Thanks, – M 

Submitted by Alan - IRA critic on Wed, 2014-11-05 00:39

  • The answer to your first question is definitely Yes. That was added to the Regs several years ago and at the time reversed the prior all or nothing requirement for inherited IRA rollovers. But based on your goal in this case, and despite the fact that an inherited IRA cannot be converted to a Roth IRA, from the tax code it appears that this does not apply to spouses. If correct, that would allow her to roll a distribution from the inherited IRA directly to an owned Roth IRA without passing through a TIRA that would subject her to RMDs if she was in an RMD distribution year as mentioned in my prior post.
  • So why do I think she can roll all or part of the inherited IRA directly to a Roth IRA?  Sec 408(d)(3) clearly states that a spousal inheritied IRA is NOT considered an inherited IRA. Further, the definition of a “Qualified rollover contribution” per Sec 408A(e) includes a rollover allowed under 408(d)(3). Therefore, any RMD due to her owning an IRA at any point in the year she reached 70.5 can be eliminated since she will not have a TIRA balance emanating from rolling the inherited IRA to her own TIRA. None of this is tied together and clearly stated in the IRS Regs or Pub 590. It seems to be one of those issues that remains buried. I have never seen it discussed by any noted IRA gurus.
  • Be sure to get the dates correct when undertaking this strategy. Her own IRA must be fully converted prior to the year she will reach 70.5 even if she reaches 70.5 late in the year. Should she have any TIRA balance in that year, she would have to take an RMD before converting any amount, and would then be able to convert additional amounts.
  • Last question – she will still be paying taxes on all these conversions. Are you sure she is not over converting by reducing her RMDs so much that she has already lowered her marginal rate in retirement?

Submitted by [email protected] on Wed, 2014-11-05 14:13

Great info.  Thanks for all of that. As to your last question, I think that’s a very good point and one that we continually debate – should we leave some amount in the TIRA to be taxed at low rates going forward, vs converting all to Roth?  Given most of our clients have significant guaranteed income from pensions and social security, they are likely to be in the 25-28% bracket based on the guaranteed income.  I don’t see a difference in converting at 25% now vs taking RMDs at 25% later accept for the fact that the RMDs coming out would be taxed going forward, while the conversion money would be tax free.Thanks for the input!-M

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