Inherited IRA Spousal Rollover?

Submitted by Randall Ruggaard on Wed, 2016-12-28 21:38

I have a tax question dealing with an Inherited IRA.

In 2015, the husband passed away at the age of 69 and left his IRA equally to his wife and two children. The wife, age 59, was advised by the IRA custodian to transfer her portion into an Inherited IRA. In 2016, she is now required to take a required minimum distribution which she has done. After she took her RMD, the custodian is suggesting to her that she can make a spousal rollover of the entire balancer from her inherited IRA to her own traditional IRA. In speaking with different representatives of the same custodian, one says that she can execute this rollover and the other rep says she cannot! Who is correct?

Can anyone provide an opinion and a tax reference to solve this dilemma???

Thanks,

Randy



Submitted by Alan - IRA critic on Wed, 2016-12-28 23:57

A surviving spouse can do a spousal rollover at anytime. But some options she would have had as a sole beneficiary of the IRA are not permissable when she is not the sole beneficiary. However, after taking the RMD this year based on her single life expectancy, she can roll the balance of her share into her own IRA. If she can get this done in the next 2 days, she will avoid further RMDs until she reaches 70.5. Here is the applicable paragraph in Pub 590 B:

However, if you receive a distribution from your deceased spouse’s IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse’s IRA.

Submitted by Bruce Steiner on Thu, 2016-12-29 14:27

  • Depending on when he was born, she might not have been required to take a distribution in 2016.  Under Section 401(a)(9)(B)(iv), she didn’t have to take distributions as a beneficiary until he would have reached age 70 1/2.
  • Bruce Steiner

Submitted by Ben Meyer on Fri, 2016-12-30 16:56

  • IRS Reg 1.401(a)(9)-3, Q&A-3(b) (corrected typo in number) adds a qualification to IRC 401(a)(9)(B)(iv) that the surviving spouse must be the sole designated beneficiary.
  • If the accounts of the two children had been transferred to separate inherited IRA accounts prior to September 30, 2016, would that have left the surviving spouse as the “Sole Designated Beneficiary”?  This also assumes that the portion for the surviving spouse remains untransferred and undistributed until after the date of September 30.  Performing the transfers in this sequence seems to allow the surviving spouse to become the “Sole Designated Beneficiary” within the scope of IRS Reg 1.401(a)(9)-3, Q&A-3(b).  She would then be able to defer RMDs until the decedent would have reached age 70 1/2.  
  • In this specific case there would not be much of a difference, since the decedent would possibly also have been 70 1/2 in 2016, depending on the specific birthday month and day.  Therefore it would be helpful to have the specific birthday posted.
  • UPDATE:  SEE UPDATED CONCLUSION BELOW

Submitted by Alan - IRA critic on Fri, 2016-12-30 19:22

Benn, these issues are pretty murky because they involve defining a separate account, and also defining the criteria for being considered a sole spousal beneficiary and when the spouse must be the sole beneficiary. I deleted my prior post because the 9/30 beneficiary determination date and the 12/31 separate accounts deadline appear to operate in a parallel universe when determining beneficiary RMDs. In most cases, the 12/31 deadline will apply since beneficiaries create separate accounts more often than they disclaim or are cashed out. The following Reg 1.401(a)(9)-8, QA 2 is partially quoted here and indicates that if the separate accounts are created by 12/31 the surviving spouse can delay RMDs until decedent would have reached 70.5. One question remains unclear and that is whether ALL beneficiaries must create separate accounts for the ones that do create them to use the separate account rules:

rules in section 401(a)(9) separately apply to such separate account under the plan. However, the applicable distribution period for each such separate account is determined disregarding the other beneficiaries of the employee’s benefit only if the separate account is established on a date no later than the last day of the year following the calendar year of the employee’s death. For example, if, in the case of a distribution described in section 401(a)(9)(B)(iii) and (iv), the only beneficiary of a separate account under the plan established on a date no later than the end of the year following the calendar year of the employee’s death is the employee’s surviving spouse, and beneficiaries other than the surviving spouse are designated with respect to the other separate accounts with respect to the employee, distribution of the spouse’s separate account under the plan need not commence until the date determined under the first sentence in A-3(b) of § 1.401(a)(9)-3, even if distribution of the other separate accounts under the plan must commence at an earlier date.

Submitted by Ben Meyer on Sat, 2016-12-31 04:32

Thanks, Alan, for pointing out the apparent disconnect between the two rules that speak to the timing of the separation of accounts.  In addition to the two regulations, PUB 590-B also weighs in on this issue, creating three sources of authority.  I can summarize as follows:

  • IRS Reg 1.401(a)(9)-3, Q&A-3(b):  Surviving spouse, as sole designated beneficiary, may delay taking RMDs until the year the decedent spouse would have reached age 70 1/2.  The implication is that any other, non-spouse, beneficiaries would need to be transferred out to separate inherited IRAs before the 9/30 date at which the designated beneficiaries are determined.  (The spousal account for the surviving spouse would also need to be retitled before the 12/31 date, but after the 9/30 date.)
  • IRS Reg 1.401(a)(9)-8, Q&A-2(a)(2):  The apparent wording seems to say that separation of accounts only need occur by the 12/31 date to allow the surviving spouse to delay taking RMDs until the year the decedent spouse would have reached age 70 1/2.  The situation with both a surviving spouse and other non-spouse beneficiaries is specifically described in regard to the 12/31 date for performing account separation.  The surviving spouse is granted the right to delay taking RMDs until the year the decedent would have reached age 70 1/2, even though the other non-spouse beneficiaries commence taking RMDs earlier, through their own separate inherited IRA accounts. 
  • PUB 590-B (December 23, 2016), p. 11, left column:  “Surviving spouse. If you are the owner’s surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions. However, if the owner had not reached age 70 1/2 when he or she died, and you do not elect to be treated as the owner of the IRA, you do not have to take distributions until the year in which the owner would have reached age 70 1/2.”

PUB 590-B seems to be citing Reg 1.401(a)(9)-3, Q&A-3(b) for the specific situation where the surviving spouse is the sole beneficiary, and is therefore also the sole designated beneficiary.  Then, Reg 1.401(a)(9)-8, Q&A-2(a)(2) would apply in different situations with multiple beneficiaries, one of whom is the surviving spouse.  So the two regulations seem to apply to two somewhat different situations, but with the same result for the surviving spouse.  Thus, the general provision for the surviving spouse in IRC Section 401(a)(9)(B)(iv)(I) is split into two different situations, with two separate regulations to cover the two cases.

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