Inherited IRA transfer to Individual IRA

I have a client (DOB 7/23/1961) who was the beneficiary of her spouse’s IRA (spouse DOB 10/16/1945). The date of death of the spouse was 10/7/2015. At the time my client’s spouse died and she received the funds she was unsure if she might need to access the account to use for living expenses. Because she is under age 59 1/2 we established an Inherited IRA for her to give her access to the account without the 10% early penalty. Her RMD for 2016 is calculated at $3,313.78 (12/31/2015 balance of $98,088.00).

Since we set up the IRA the client found out about a life insurance policy that she was not originally aware of and after it was paid to her provides enough funds that the client will not need to access the retirement funds until after age 59 1/2. The client now wants to transfer the Inherited IRA to an Individual IRA in the client’s name.

First question – Can the client transfer the Inherited IRA to an Individual IRA (This funds came from her spouse)?

Second question – If yes to first question, does she have to process the 2016 RMD prior to transferring the account to her own IRA or can she transfer to her own IRA without taking the 2016 RMD since she would be closing the inherited IRA in 2016?



See Treas. Reg. § 1.408-8 A-5(a):  https://www.law.cornell.edu/cfr/text/26/1.408-8.

The client can roll over the inherited IRA anytime. As the above referenced Reg. indicates, a full rollover will eliminate her RMD for 2016 because of her age. She is considered to have owned the IRA for the entire 2016 year. Natalie Choate refers to this in the following paragraph from her book, but where she indicates that this applies if the owner passed in the year they reached 70.5 or later, it actually applies regardless of the age of the IRA owner at death.

How can you erase an MRD that’s already accrued? Answer: A surviving spouse who 

 

is sole beneficiary of her deceased spouse’s IRA is required to take an MRD as beneficiary in the   year after the year of the participant’s death (if the participant died in his age 70½-year or later); but   if in that calendar year she elects to treat the IRA as her own IRA, her MRD “as beneficiary” for that   year becomes “unrequired.” She is treated as “the participant” (owner) of the IRA retroactive to the   beginning of the year, meaning that no distribution is required if she is under age 70½. ¶ 3.2.04. 

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