Rolling Over a deceased spouse IRA
I have a customer that cashed in his wifes IRA when she died and rolled it into an IRA in his name. The IRS is telling him he owes taxes on it now. Can you explain this or is it an error that was done by his HR Block rep? Thanks
Permalink Submitted by Alan Spross on Mon, 2011-08-08 20:52
He had 60 days to roll the distribution over to his IRA. If so, it should be reported like a rollover on lines 15a and 15b of his tax return. There should be no taxable income for this on 15b. If this was done correctly, then the problem is with the IRS and he will need to reply to their letter with evidence of the rollover including statements showing the date of distribution and contribution to his IRA.
That should eliminate the problem.
Permalink Submitted by mk foss on Tue, 2011-08-09 17:39
Reporting by the custodians often leads to this problem. If an individual rolls a 401k plan to an IRA – they get a 1099R marked rollover. If an individual rolls IRA funds between custodians, they might not get a 1099R but if they do, it’s marked rollover. When a surviving spouse rolls over the deceased spouse’s account, the 1099R is coded 4 for death distribution. The coding is the same if they roll it or if they cash it out.
Given that you can see why IRS might question it, but a spousal rollover should not be taxable.
Permalink Submitted by fairira on Thu, 2011-08-11 04:44
What coding would likely be used if a 75 year-old surviving spouse assumes her 77 year-old husband’s IRA when all of this is done at the same institution (Vanguard) ?
Permalink Submitted by fairira on Thu, 2011-08-11 04:49
I should have made clear that this is not a rollover but is a transfer of IRA assets from the deceased’s IRA account at Vanguard to the spouse’s IRA account at Vanguard.
Permalink Submitted by Alan Spross on Thu, 2011-08-11 21:22
If a 1099R is generated on the inherited IRA account, it will be coded “4” which is a death distribution.
Once funds are rolled into the owned IRA, distributions will be coded “7” for those over 59.5. And if RMDs are not taken by a surviving spouse (Code 4) by the close of a year with a beneficiary RMD requirement, the sole spouse beneficiary is deemed to have automatically assumed ownership. That would change distributions to code 7 in future years.
Permalink Submitted by fairira on Fri, 2011-08-12 18:34
Alan, thank you for your post and a reply re if the following is correct.
If the deceased took his RMD in the year of his death and his spouse assumed the balance of his IRA the same year and if then two 1099R’s are issued, one for the deceased’s RMD (code 7) and of course taxable and one for the “death distribution” into the spouse’s IRA (code 4), the latter should be reported like a rollover on lines 15a and 15b of the spouse’s tax return.
Permalink Submitted by Alan Spross on Fri, 2011-08-12 19:07
Correct.