IRA Rollover

Submitted by Anthony Zalesky on Tue, 2017-05-30 15:38

The question is about a rollover and here are the particulars:
A client who very recently passed away had an IRA invested into an annuity. The deceased spouse had her spouse as the primary beneficiary 100%. A primary goal for this couple is to leave as large as an inheritance as they can to their children. The surviving spouse is not insurable. We have an option to have the deceased spouse’s IRA transferred into a new annuity IRA which would provide a substantial death benefit, however, there was a time limit to doing so (the client had to open and fund the policy prior to age 73 and his birthday was 5/28, we had the policy open and funded with $5k on 5/26 to lock in the rider and the plan was to move the other IRA in later. Basically, we only had one day to make this happen. The surviving spouse, who opened the new IRA is still working, and we forgot that because the client is over 70 1/2, they no longer can make an IRA contribution. So we had the $5k coded as a rollover with the intent to distribute money from his other IRA, an account total unrelated to everything mentioned above. The idea was that the $5k is a rollover and the money that is going to be distributed will be the source of the rollover, the problem is the timing.
Here’s my question, can the client put money into an IRA and have it designated as a rollover and then subsequent to that (within a week or so), have $5K distributed from his existing IRA and but still code the $5k as a rollover. So the timing is such that the money from the existing IRA is distributed after the original contribution is made to the new IRA contract. How do you believe this will be viewed?

Additionally, We simultaneously had paperwork signed to open an IRA, and to distribute the money from an existing IRA. The plan was to fund the new IRA with a check, coded as a rollover resulting from the distribution of the money from the existing IRA. It turns out the money hit the new IRA before the money was distributed from the old one. Two questions:

1) Is this ok? Can the new IRA still be coded as a rollover? Is this a taxable event?
2) If we later did a trustee to trustee transfer into the new IRA (from other unrelated IRAs) would that money be effected in anyway?



Submitted by Alan - IRA critic on Tue, 2017-05-30 18:54

  1. No, a rollover can only be funded by a distribution within the prior 60 days. This created an excess regular IRA contribution which must be distributed. The only way to avoid an excess contribution is to have the IRA contribution recharacterized as a Roth IRA contribution if the surviving spouse’s income is not too high. While that might create other problems, if the prior client’s death was this year, 2017 is the last year to file jointly meaning that a Roth conversion of the inherited IRA could be done at a lower tax rate than post 2017. In considering this, the projected tax bracket of the children who will inherit should be considered. The higher their projected bracket, the better an inherited Roth would be for them.
  2. Other TtoT transfers would not affect the above situation as they are separate transactions. Of course, if transfered into a Roth IRA, the transfer would be taxable. Client might consider a partial transfer, weighing the amount of the death benefit against the tax bill for a conversion.
  3. Note that any conversions or distributions cannot be done until the RMD for the year has been completed. Rollover of an RMD amount also creates an excess contribution to the receiving IRA, whether TIRA or Roth. Further, if the year of death RMD (if applicable) was not completed by the decedent before passing, then the surviving spouse acquires that responsibility as well.

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