Spouse inherits Husband’s IRA

Submitted by Gerard Stellwagen on Tue, 2019-03-19 16:59

H died at age 90, leaving IRA to wife who is 85,
Broker distributed funds to wife and created a 1099-R showing fully taxable.
She rolled over the entire amount to her IRA.
Did she escape immediate taxation? (Assume she did the rollover in 60 days and it was her only one for the year.)



Submitted by Alan - IRA critic on Tue, 2019-03-19 17:09

No taxes are due as long as she reports the 1099R as a rollover on Form 1040. Hopefully, she has taken care of any RMDs including that for husband’s year of death if that was not completed.

Submitted by Eddie Kelley on Wed, 2019-03-20 12:30

This has occurred with one of my clients also and it’s not going well.  The brokerage used  code 4 on the 1099R meaning it’s a death benefit.  This prompted a correspondence audit requiring my client to prove it was a deceased spouse’s IRA and that it was rolled over (despite the fact we have a 5498 showing a rollover contribution, which apparently the IRS completely ignores).  This is the second such audit on two clients in a row (the first audit being no problem).  My client being elderly and depressed did not respond to the IRS notice and got in touch with me too late to meet the 30 day deadline.  The IRS immediately went nuclear and issued him a notice of intent to levy (likely machine generated).  This happened during the shutdown so we’ve had no one to talk to.  Now the IRS has given us until June 1 to pay or make my client’s brokerage change the coding on the 1099R to the rollover code.  The broker is adamant that they have to use Death Benefit per IRS instructions and refuse to amend the form.  As of now we’re stuck between a rock and a hard place.    I’m going to give Problems Resolution one more try (they weren’t of much help on the first call) and then I’m going to find someone who deals in IRS representation.  By the way my client lives in Colorado and I’m in Texas, doesn’t use a computer so that complicates matters.  I begged him to get a CPA in Colorado, but he’s pretty stubborn about that idea.  I apologize for this long winded story,but I help this helps in some way for others reading this.

Submitted by Alan - IRA critic on Wed, 2019-03-20 15:55

  • A potential issue is created when a sole surviving spouse takes a distribution from the inherited IRA because that will generate a code 4 1099R as well as causing RMD issues. If the inherited IRA has an RMD due for the rollover year or for the year of death, part of the distribution is an RMD and not eligible for rollover. The IRS may have overlooked this issue in this case. Yet another problem is that a 60 day rollover will not even be permitted if the surviving spouse does not have a 60 day rollover available. A recent IRS PLR clarified that a distribution rolled over by a beneficiary is treated the same as a rollover from the beneficiary’s own IRA for purposes of the one rollover limitation. Therefore. the best way to eliminate these issues is for the surviving spouse to notify the IRA custodian that they are electing to assume ownership of the inherited IRA. The custodian will usually then transfer the IRA into a new account as a non reportable transfer. The surviving spouse can then do another non reportable transfer to another IRA custodian if they wish to consolidate or otherwise move the account to a new custodian. Since neither of these transactions should be reported on a 1099R, there is no possibility of an RMD not eligible for rollover or of running afoul of the one rollover limitation. Also no reporting on Form 1040. 
  • In your case, the IRA custodian is correct. They must use Code 4 if a distribution is taken from an inherited IRA, rather than from one that has been assumed by the surviving spouse. But the client should eventually be able to prove to the IRS that the decedent was a spouse, and the rollover is therefore allowed. See Pub 590 B, p 5.  Perhaps this shows that the IRS is beginning to look into these rollovers, since this issue has rarely occurred in the past. But they still may be overlooking other related issues.

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