Spouse changes from inherited IRA to rollover IRA

Submitted by Harold Morrow on Wed, 2017-12-13 23:29

Wife inherited husbands IRA. Husband was over 70 1/2 and taking RMD’s and wife was 60 years old in year of death (2013). Wife held the IRA as an inherited IRA until February 2017. Wife took RMD’s for the years 2013-2016. Wife rolled over these funds to her own IRA 2/28/2017. Is Wife required to withdraw RMD for 2017 since the IRA was an Inherited IRA for the first 2 months of 2017?



Submitted by Alan - IRA critic on Thu, 2017-12-14 00:14

  • While you rarely hear about the “spousal election”, technically the wife can avoid the beneficiary RMD if she makes the election to treat the inherited IRA as her own. She must make that statement to the custodian, who will re title the IRA as her own and she can then do the rollover or direct transfer to another of her IRAs with no RMD required for 2017. Another way to doing this is to do nothing in 2017, and by failing to take out the beneficiary RMD she is deemed to have become the owner by default. Yet another way to make the election is to make a regular IRA contribution to the inherited IRA.
  • But what if she just took a distribution and did NOT make the election of ownership? In that case, the amount of the distribution equal to the beneficiary RMD remains an RMD and is not eligible for rollover, but the rest of the distribution (in excess of the beneficiary RMD) is rollover eligible and she then avoids RMDs on the rest until she reaches 70.5. But she will get a 1099R code 4 for the amount of the RMD.
  • There is a huge gray area in how custodians handle these requests. In many cases the spouse fails to voice an election but if the owned IRA is with the same custodian the custodian might change the title before the transfer. The IRS often shows little concern whether the election was actually made or not and since IRS enforcement of RMD rules is so spotty, there are many cases where no election is requested or deemed by one of the actions above, and the IRS just assumes that the election occurred.

Submitted by Ben Meyer on Thu, 2017-12-14 03:51

  • In the second bullet item it looks like you are saying that surviving spouse can make the spousal election by taking a distribution from the inherited IRA which is larger than the RMD.  Then she can re-deposit the excess amount that exceeds the RMD back into the same account.  By the act of making a rollover deposit the account becomes the surviving spouse’s own IRA.  Thereafter no RMD is required until she reaches 70.7 (specifically by April 1 of the year following the year of reaching 70.5).
  • This sounds like a good way of making the spousal election, since it provides an audit trail of the necessary predicate acts.  The IRA custodian will then need to change the title.  Many custodians will probably also change the account number due to their internal data processing system requirements.  When the custodian changes the title of the account to be the surviving spouse’s own IRA, it will also stop reporting that an RMD is due on form 5498, box 11, until age 70.5.

Submitted by Alan - IRA critic on Thu, 2017-12-14 04:20

  • No, I did not mean in point 2 that the election to assume ownership had been made for the inherited IRA, as the distribution including the RMD was made from a still inherited IRA. As such the RMD was not eligible for rollover or eligible to be erased due to the election or assumption of the account before the distribution. That does not mean that the rest cannot be rolled into her own IRA, but the RMD cannot be rolled over since the election was not specifically requested or automatically secured by default. She still ends up with an owned IRA, but failed to erase the beneficiary RMD. If she had elected ownership of the inherited IRA, the RMD for that year would be eliminated.
  • The 5498 should still be issued reporting the year end value of the account even when there is no RMD. However, in a recent article by Natalie Choate she pointed out that Box 11 of the 5498 indicating an RMD requirement for the following year is ONLY for participants, not for IRA beneficiaries. Another reason why enforcement of beneficiary RMDs is almost non existant. When asking for a penalty waiver all they have to do is state that Box 11 indicating an RMD requirement was unchecked and they would be correct. Just showing the year end FMV is not going to improve RMD compliance.

Submitted by Ben Meyer on Fri, 2017-12-15 22:17

  • I think my posting was misunderstood.  When the surviving spouse takes a distribution of more than the RMD from the inherited account, the portion that exceeds the RMD is rollover eligible.  Then she can deposit the portion that is rollover eligible back into the inherited account.  That act will cause the inherited account to become her own IRA.  She will keep the portion of the distribution that is the RMD.  This is the situation described in PUB 590-B (2016) at page 5, left column, which reads:

Treating it as your own. You will be considered to have chosen to treat he IRA as your own if:     – Contributions (including rollover contributions) are made to the inherited IRA, or …

  • This method can be used if the surviving spouse has no other IRA from which to take a distribution for rollover, and has no earnings from which to make an IRA contribution, and can be done without making a spousal election to the IRA custodian.  The surviving spouse will keep the RMD portion of the distribution since it was not rollover eligible when it was made.
  • Interesting to hear that box 11 of form 5498 is not checked for an inherited IRA.  The section for Inherited IRAs in the instructions for form 5498 describes the requirement for reporting the fair market value and proper titling, but makes no mention of box 11 or an RMD.

 

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