Partial conversion of spousal beneficiary IRA to traditional
MetLife says I cannot do this, but I think they are wrong.
A client’s spouse died and she took consolidated his various plans into a beneficiary IRA. She is 47, he was 50. We want to move PART of this to an account at MetLife that has a lifetime guaranteed income feature, but they cannot put that income feature on a beneficiary IRA, only a traditional IRA.
I want to transfer PART of her beneficiary IRA to a Traditional IRA at MetLife. She will leave the traditional IRA “untouched” until age 60, at shich time the guaranteed lifetime income is available. This will leave enough in the beneficiary IRA to last until age 60.
Am I right that I can do a PARTIAL rollover from spousal beneficiary IRA to traditional IRA can be done at any time, or is it an “all-or-none” deal?
MetLife says that, once it is a beneficiary IRA, even for a spouse, it can never be changed to a traditional IRA and I know that is incorrect.
It appears that, I am correct, but if MetLife cannot take it this way, I could set up a traditional IRA at the current custodian, transfer $X from the beneficiary IRA to the traditional, then do a “standard” traditional IRA transfer, but that’s a lot of hoops to make the client jump through.
Permalink Submitted by Alan Spross on Tue, 2010-08-24 19:52
Yes, you can do a partial rollover or several partial rollovers of a spousal inherited IRA to an owned IRA at any time. The only thing you cannot do is go back to a beneficial interest of the portion that is rolled to an owned IRA.
Yes, Metlife is incorrect. These are all traditional IRAs, but I think you are referring to an owned traditional IRA. Their statement is only true for a non spouse inherited IRA and that opinion is also costing them business. You might elevate this issue to a more senior staffer there. Getting them to see the light would eliminate the longer work around.
Note that there are NO RMDs required for the beneficiary IRA until her husband would have reached 70.5, but she can take any distributions she wishes from the beneficiary IRA without penalty. She should assume ownership of the beneficiary IRA no later than when beneficiary RMDs would have to start.
Finally, remember to deal with any basis she may have inherited if her husband made non deductible contributions per Form 8606. She inherits that basis and a pro rated amount of it would stay with the inherited IRA and the rest would become her basis in the owned IRA along with any basis she might have had with other IRAs she owns.
Permalink Submitted by Tom Brattain on Tue, 2010-08-24 23:27
Thanks.
That is exactly how I understand this to work, but both the current and future custodian claim that, once a distribution has been made from the beneficiary IRA, an “irrevocable decision NOT to rollover” the plan has been elected. My understanding is that this rule was repealed several years ago, but where can I find any code reference or ruling to show the custodians? Does anybody have any revenue ruling numbers or supporting evidence that I can show the custodian(s)?
Permalink Submitted by Alan Spross on Wed, 2010-08-25 00:55
Tom.
Following is a copy of Q&A 5 from IRS Reg 1.408-8. It is very clear:
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Q–5. May an individual’s surviving spouse elect to treat such spouse’s entire interest as a beneficiary in an individual’s IRA upon the death of the individual (or the remaining part of such interest if distribution to the spouse has commenced) as the spouse’s own account?
A–5. (a) The surviving spouse of an individual may elect, in the manner described in paragraph (b) of this A–5, to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if distribution thereof has commenced to the spouse) as the spouse’s own IRA. This election is permitted to be made at any time after the individual’s date of death. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust. If the surviving spouse makes the election, the required minimum distribution for the calendar year of the election and each subsequent calendar year is determined under section 401(a)(9)(A) with the spouse as IRA owner and not section 401(a)(9)(B) with the surviving spouse as the deceased IRA owner’s beneficiary. However, if the election is made in the calendar year containing the IRA owner’s death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A–4(a) of §1.401(a)(9)–5, to the extent such a distribution was not made to the IRA owner before death.
(b) The election described in paragraph (a) of this A–5 is made by the surviving spouse redesignating the account as an account in the name of the surviving spouse as IRA owner rather than as beneficiary. Alternatively, a surviving spouse eligible to make the election is deemed to have made the election if, at any time, either of the following occurs —
(1) Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B); or
(2) Any additional amount is contributed to the IRA which is subject, or deemed to be subject, to the lifetime distribution requirements of section 401(a)(9)(A).
(c) The result of an election described in paragraph (b) of this A–5 is that the surviving spouse shall then be considered the IRA owner for whose benefit the trust is maintained for all purposes under the Internal Revenue Code (e.g., section 72(t)).
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