Spousal Conversion of Inherited IRA?

Submitted by Clifford Haugen on Mon, 2023-05-01 20:24

Pre-SECURE Act, a client’s spouse died while they were both young (less than 59 1/2). There was a material chance the surviving spouse was going to need funds from the deceased spouse’s IRA to support the family. To avoid early withdrawal penalties, the surviving spouse opted to take the deceased spouse’s IRA as a beneficiary IRA.

The surviving spouse is now over 59 1/2 and would like to roll that beneficiary IRA into their own IRA as there are no longer early withdrawal penalties to worry about. Custodian is saying this isn’t possible.

Is a surviving spouse that opted for a beneficiary IRA able to later roll that beneficiary IRA into their own IRA?

I realize the answer for non-spouses is a clear no. What I wasn’t clear on was the answer for spouses.

Thanks!



Submitted by Alan - IRA critic on Mon, 2023-05-01 21:40

  • It is surprising that some of these restrictions on surviving spouse options is not getting more attention. The election to assume ownership by request or by default now ends at the LATER OF the end of the year after the year of decedent’s death or the year in which the surviving spouse reaches 73. Is the client 74 or over this year? If not, the custodian should comply with the request to assume ownership.
  • Further, this new age based restriction for assuming ownership and avoiding a distribution does NOT apply to actual 60 day rollovers and the custodian is incorrect about that. These are still allowed after the above election dates expiration.  The difference is that a 60 day rollover from the inherited IRA would not be allowed to include the higher beneficiary RMD for that year, and it would also exhaust the one permitted rollover within a 12 month period or would not be allowed at all until a prior 60 day rollover from any of beneficiary’s IRAs had aged by 12 months. 
  • There is no reason not to continue such spousal inherited IRAs as before, except that these accounts should be flagged to complete the election of ownership before that beneficial option expires and an actual distribution is needed to complete the spousal rollover. 
  • Another option that a surviving spouse should avoid is opting out of EDB treatment and into the 10 year rule to avoid beneficiary RMDs in years 1-9 with the intent to do the spousal rollover in year 9 (waiting until year 10 would make the entire distribution an RMD!). But doing so in year 9 will still result in having to make up all the prior year beneficiary RMDs that were avoided using a “hypothetical RMD calculation”. This process is outlined on page 241-244 of the proposed Secure Act Regs. In short, this option should be avoided entirely.

Submitted by Clifford Haugen on Tue, 2023-05-02 00:57

Your advice was very helpful and got me pointed in the right direction.  Thanks!  For others to reference…See https://www.irs.gov/irb/2022-11_IRB in IV. Section 1.408-8 — Distribution Requirements for IRAs and see also https://www.law.cornell.edu/cfr/text/26/1.408-8

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