IRA choices for a surviving spouse - Rollover vs. ownership

Submitted by John Ahern on Sat, 2011-12-24 21:06

I know that the surviving spouse who is the sole beneficiary of the deceased spouse’s IRA has various options, two of which are almost the same. These are
1. She can elect to roll over the deceased spouse’s IRA to her own IRA.
2. She can elect to be treated as the owner of the deceased spouse’s IRA.

But can someone explain, with an example, when electing to be treated as the owner is better than a roll over?

John Ahern

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Permalink Submitted by Alan Spross on Sat, 2011-12-24 23:38

As the following article explains, the effect is the same for the surviving spouse, but the mechanics are typically determined by the IRA custodian according to their processing platform. There is no difference with respect to taxes or RMDs for the surviving spouse.

The main choice for a surviving spouse is whether to maintain the IRA in inherited form or to assume ownership, as that decision does have tax and RMD implications. Failing to take an RMD as required from an inherited IRA by a sole spouse beneficiary results in a deemed change of status to that of an IRA owned by the surviving spouse:

http://www.retirementdictionary.com/faqs/howdoesspousetreatasown

Permalink Submitted by John Ahern on Mon, 2011-12-26 16:44

Thanks for your response. Here is what I have concluded reading your response and doing my separate research. The difference to the surviving spouse between taking over the deceased spouse’s IRA as owners vs. rolling it over into her own IRA under current rules is – There is no appreciable difference.

It did give the surviving spouse an option before the 2001 IRS change depending on if the deceased spouse used recalculation or not. But that was done away with in 2001. There may be a future law change that can use this ownership vs. rollover option. I see no harm in using one over the other, but I see no advantage either.

Hoping to be proved wrong.

John Ahern

Permalink Submitted by mk foss on Tue, 2011-12-27 01:15

If the spouse rolls over the benefits, he/she names new beneficiaries and stretches benefits over her life expectancy from the uniform table. For a 70 year old, the first RMD after a rollover would be about 4%.

If the spouse takes the benefits as an inherited IRA, he/she takes RMDs over life expectancy from the single life table. For a 70 year old that would be over 16-17 years; the benefits would come out at a faster pace with no additional stretch at the death of the inherited IRA holder.

Rollover seems to be the best unless the surviving spouse is under 59-1/2. A younger spouse can start with an inheried IRA and roll over the benefits at a later date – when no penalty would apply.

Permalink Submitted by John Ahern on Wed, 2012-01-04 02:03

Within days of writing my second post (above) an unexpected event happened that showed me one instance where there may be a benefit of taking ownership. This was pretty unusual so should not be used as a guide to do such things.

I have a widow who has not reached her RBD yet. Her deceased husband was over his RBD and taking distributions. He died in 2009 (a no RMD year). The widow procrastinated until the end of 2011 to take her husband’s 2010 and 2011 RMD before rolling over the account to her name. The IRA legal department for the broker (Morgan Stanley) corrected all of us and said that no RMD was necessary. They pointed out that because the widow procrastinated and did not take the 2010 RMD, she effectively took ownership of the IRA in 2010. (This can only be done for a widow who is the sole beneficiary.) See Natalie Choate’s 2006 edition at 3.2.04 D.3 (page 170). “Failure to take an MRD” is effectively the same as making an affirmative election to take ownership.

The widow lucked out. She should have immediately rolled the account to herself in 2009, but achieved the same end by accident.

John Ahern

Permalink Submitted by Alan Spross on Wed, 2012-01-04 03:54

Right. I mentioned this contingency in my 12/24/ post.

The 2010 RMD was actually HER RMD and based on her life expectancy being younger, but since she did not take the full RMD required as beneficiary she defaulted to the ownership status at the close of 2010. Since she apparently still has not reached her RBD, she will not have to worry about asking the IRS to waive the penalty for failing to take an RMD in 2010 or 2011.

Morgan Stanley should now re title the IRA in her name as owner, or as is more typically done open a new IRA account for her and transfer the funds to that IRA account.

Permalink Submitted by Steve Blankenship on Mon, 2013-06-10 23:21