Scenario- Spousal IRA vs Inherited IRA by Spouse

Submitted by Bill Schretter on Mon, 2018-02-12 22:52

When a spouse dies, can the surviving spouse do the following without incurring a 10% penalty:

Convert the decedent IRA’s into a “inherited IRA”, take a withdrawal that is not charged the 10% penalty for being under 59.5. Then convert and consolidate the remaining IRA balance to their own IRA account in the same year.

Does a surviving spouse have to convert 100% of the decedent spouses IRA into their own, or can they do a partial withdrawal/partial conversion? Reason, they need the cash to pay off a loan that was defaulted on due to death that they can not renegotiate and they do not have cash yet to pay. The goal, is within 45 days, to put the money back in to pay off the 60 day withdrawal balance.

Is the choice of Inherited IRA status versus spousal consolidation a single one time decision that must be made immediately or can they consolidate later ( what is the required time frame), What happens with transactions that have occurred in the interim?

They do not yet know what cash they will have on hand and need for other needs. Most of the current assets are in IRA accounts or real estate (that need to be liquidated)



Submitted by Alan - IRA critic on Mon, 2018-02-12 23:39

  • The surviving spouse can take one or more partial distributions from the inherited IRA without penalty. They can roll over only one of these distributions in a 12 month period to their own IRA within 60 days. They can roll over the rest of the inherited IRA at anytime to their own IRA, but the one rollover rule will be a challenge. They can also “assume ownership of the inherited IRA without doing a rollover. Therefore, there is flexibility but the main challenge is the one rollover rule per 12 months. Sounds like they should first take the distribution they need and make sure it is large enough, then complete the rollover, either full or partial. Next advise the custodian that they are electing to be treated as the owner of the inherited IRA (I assume the spouse is the sole beneficiary), since they cannot take another distribution and roll it over until a year passes from the first distribution date. Another option is to roll the distribution back to the inherited IRA, which is the same as electing to assume ownership since any contribution by a sole spousal beneficiary to the inherited IRA is deemed to constitute election of ownership.
  • Inherited IRA RMDs for a sole spousal beneficiary must begin no later than 12/31 of the year that the deceased spouse would have reached 70.5.
  • Therefore, some careful planning is called for before acting.

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