One-time spousal Rollover of a Traditional IRA inherited from a deceased wife

Submitted by James Bradley on Sat, 2018-06-09 18:10

Background: I am over 70-1/2 (will be age 74 at the end of 2018) and taking RMDs from my traditional IRA. My wife passed away in 2017. She would not have been 70-1/2 until 2020 (at which time my end of year age will be 76). We both have substantial traditional IRAs and both IRAs are about 98% taxable income when taking distributions. I elected to “inherit” her IRA in 2017 because: (1) I did not need the income from her IRA and (2) it would permit me to delay having to RMDs until the year she would have been 70-1/2 (i.e., 2020).
My plan is to do a one-time permitted Rollover of my wife’s now inherited IRA in to my IRA prior to 2020 (when she would have turned 70-1/2). The reason for this rollover is so that my RMD will be smaller because I can use Table III (Uniform Lifetime) rather that leaving her IRA as “inherited” and having to take RMDs under Table I (Single Life Expectancy/For Use by Beneficiaries). My RMD using Table III at age 76 (factor = 22.0) generates a much smaller RMD than using Table I at age 76 (factor 12.7). Since I don’t need the money and would like it to continue to grow tax free for my child, I plan on doing a one-time rollover from the traditional IRA I inherited from my decease wife in to my traditional IRA.
Question: I would like to confirm that all of my assumptions in the two previous paragraphs are correct, and secondly that I should make the one-time rollover of the inherited IRA in to my IRA sometime after 12/31/2018 and before 12/31/2019. Additionally, assuming that I made that rollover in 2019, my RMD for 2019 would be computed only on my end of 2018 IRA balance – that is, without the amount of the inherited IRA from my wife.
I would appreciate any comments regarding my plan.

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Permalink Submitted by Alan - IRA critic on Sat, 2018-06-09 19:30

Your understanding is correct, except that you are coming up one year short. Since your plan is delay RMDs as long as possible, you can wait until 2020 before electing to assume ownership of your inherited IRA. When you make this election in any year after the year the IRA owner passed, you are treated as if you owned the inherited IRA for the entire year of the election. Therefore, if you elect ownership in 2020, your 2020 RMD will be calculated from the Uniform Table III and applied to the 12/31/2019 value of the inherited IRA at that time. This avoids any RMD in 2019.
It is best to elect to assume ownership at that time because you can then do a non reportable trustee to trustee transfer into your own IRA without having to report a rollover on your return. You can only do one rollover over 12 months, so it is best not to use up your rollover unnecessarily.
Note that were you to pass before electing ownership with the inherited IRA, your child (named as your beneficiary on the inherited IRA) would be treated as a designated beneficiary and could take RMDs using their single life expectancy. However, if you forgot to elect ownership and withdrew the higher beneficiary RMD in 2020, and then passed your child would be a successor beneficiary and would have to continue your beneficiary RMD schedule, and that would result in loss of much of the child’s stretch.
It sounds like your wife and you both have IRA “basis” from non deductible contributions per Form 8606. Once you elect ownership her remaining 8606 basis is added to your basis, so when you take your Uniform Table RMD in 2020, add her unrecovered basis to line 2 of Form 8606 and that will increase the basis in your combined owned IRA going forward.