Inherited IRA rollover to Traditional IRA???
[u][b]Facts of Case[/b][/u]:
Husband just died at age 71 with 80k Traditional IRA.
His wife, age 57, is the sole beneficiary. She has 320k Traditional IRA.
Wife has other non-IRA funds but still thinks there is a better than 50% chance she will need to access deceased husband’s IRA funds before her age 59 ½.
[b][u]What I’d like to do[/u][/b]:
I’d like to have the wife roll the deceased husband’s 80k Traditional IRA to an Inherited IRA (i.e. an account titled, “IRA Jane Doe, John Doe Deceased”…also known as a “Beneficiary IRA”). That way if she needed these funds prior to her age 59 ½ she could access without the 10% penalty. I understand she will need to take an RMD each year this account is open. When she turns age 59 ½ I’d like her to rollover the proceeds of this inherited IRA to her existing Traditional IRA in order to remove the funds from an environment where a RMD is necessary.
[u][b]The Problem[/b]:[/u]
I cannot tell for sure if the IRS would allow the wife to rollover the proceeds of an inherited IRA to her Traditional IRA. We’ve looked at Publication 590 and the Master Tax Guide. We’ve also contacted two major custodians we use and both have people that say this type of rollover is allowable. However, both also have people that say this type of rollover is NOT allowable.
The faction at both custodians that say the rollover IS allowable state that while a non-spouse beneficiary could NOT rollover the proceeds of an inherited IRA to their Traditional IRA, a spousal beneficiary CAN. I am inclined to believe you CAN because the spousal beneficiary has the choice of both upon death of their spouse while a non-spouse beneficiary does not. The bottom line, though, is that I just don’t know.
[b][u]My Question[/u][/b]:
Do you know who is correct: those who say a spousal beneficiary MAY rollover the proceeds of their Inherited (or Beneficiary) IRA to their Traditional IRA OR those who say a spousal beneficiary may not?
Permalink Submitted by Alan Spross on Wed, 2009-09-02 01:24
You can do as you plan, since a surviving spouse can roll over the inherited IRA proceeds any time they choose, even many years after inheriting it. The rollover can be done directly or indirectly since a spousal inherited IRA is not considered inherited for rollover purposes. In fact, if the survivor fails to take an RMD as required for a spousal beneficiary, then ownership is deemed to have occurred. In this case, it could mean that ownership occurs before age 59.5, which would subject any distributions to the penalty, but on the other hand there would be no RMDs yet as owner.
Surviving spouse can also convert directly to a Roth IRA, if desired, and if modified AGI is not too high. Income limits end after this year.
Actually, what you intend is standard procedure unless the survivor is confident in not needing distributions until age 59.5. In addition, once the rollover occurs, any inherited basis from Form 8606 of the husband would be added to any basis of the surviving spouse for determining taxation of distributions or conversions. While maintained in inherited form, a successor beneficiary should be named. But since the decedent was RMD age, the survivor’s beneficiary does NOT get a stretch if the survivor passes while the IRA is still in beneficiary form. This is a reason not to delay the rollover beyond age 59.5.
It is fairly frequent that younger surviving spouses do a rollover based on bad advice or no advice. Then, in any effort to avoid the early withdrawal penalty they end up starting a 72t (SEPP plan) that must run for 5 years or until age 59.5. This will avoid penalty, but is risky and if the SEPP is busted, then retroactive penalty and interest is due back to the beginning of the plan. A 72t is best avoided except as a last resort.
Permalink Submitted by Paul Housey on Wed, 2009-09-02 12:56
Alan oniras – might you also consider moving a portion to the inherited IRA and a portion to her own IRA? For instance, at age 57, she could make a very conservative estimate of how much she might need before 59.5 and move only that amount to the inherited so the RMD’s would be lower and the stretch from her own IRA would be available on a larger amount if she dies before 59.5 prior to combining the inherited with her own IRA?
Permalink Submitted by Alan Spross on Wed, 2009-09-02 21:44
Yes, that can be done. Only the amount that will be needed in the inherited account needs to be left there. The rest can be rolled over to an owned IRA. Of course, this is a one way option and the funds can never be transferred back to inherited status in the event they overshoot the partial rollover.
Permalink Submitted by Robert Karras on Fri, 2023-01-06 14:34
Hello, I would like to know if the original post / question is still allowable? Can a surviving spouse elect the Inherited IRA option due to funds needed via RMDs for X amount of years and when they turn 59&1/2, or at any time – can they transfer the Inherited IRA over into an exisiting Rollover IRA? Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2023-01-06 15:11
Yes, this is still allowed. Beneficiary RMDs are not required for a sole spouse beneficiary until the year the deceased spouse would have reached (70.5, 72, or 73) based on deceased spouse’s DOB. If the surviving spouse fails to complete a beneficiary RMD, they are treated as having assumed ownership at the end of that year.