Inherited IRA

Submitted by BruceM on Wed, 2012-06-06 03:04

Does the 60 day rollover rule apply to inherited IRAs?
That is, once the inherited IRA is established at the custodian of choice, may the beneficiary withdraw any dollar amount and then replace it within 60 days without tax?

BruceM



Submitted by Alan Spross on Wed, 2012-06-06 03:32

Hi Bruce,

Only if the beneficiary is the surviving spouse and the distribution is rolled over to their own IRA. If the surviving spouse takes a distribution and rolls it over to an inherited IRA they are deemed to have assumed ownership of that IRA (Pub 590, p 16). The tax code further indicates that an IRA inherited from a spouse is not treated as an inherited IRA for rollover purposes, but that does not mean that the spouse can take a distribution and roll it back to an inherited IRA.

A non spouse beneficiary can only move funds by direct trustee transfer, and that of course eliminates temporary use of the funds. This restriction also applies to inherited qualified plans for a non spouse beneficiary who wants to move funds to another account such as an inherited IRA or inherited Roth IRA.



Submitted by BruceM on Wed, 2012-06-06 15:50

Hi Alan, and thanks for the reply.
A few more details.

The situation I’m referring to involves an early 50s widow whose husband died earlier this year, naming her as the only beneficiary to his TIRA. She thought she would need to withdraw funds to meet living expenses for this year, so withdrew $40,000 from it which is a bit more than the RMD will be next year, which is fine with her as she believes she’ll need the supplemental income over the next several years. But for this year, she just learned that her deceased husband’s employer covered all employees with a $50,000 group term life insurance plan, and so she would like to put the money back, which she had withdrawn near the end of May. But she had the IRA labeled as ‘inherited’ (both spouses name in the IRA title) so as to avoid the 10% penalty, and is now concerned she will not be able to do the 60 day rollover. From p.17 of Pub 590, it appears she can do the 60 rollover into her own IRA….but are you saying she as the spouse can do a rollover and maintain the ‘inherited IRA’ status, or would it become a defacto owned IRA, meaning next year any withdrawal by her would be subject to the 10% penalty?

Thanks

BruceM



Submitted by Jose Morales on Wed, 2012-06-06 16:12

Hello Bruce,

The “inherited” status of that $40,000 has been lost as soon as the distribution was taken. The spouse can roll the funds over to an IRA in her own name. If the spouse rolls these funds back over into the inherited IRA then not only will the $40,000 no longer be considered part of an inherited IRA, but the whole IRA will be deemed as having been assumed under the spouse’s name. If the spouse wishes to maintain the “inherited IRA” status of the remaining funds that were not withdrawn then they should roll over the $40,000 to a new IRA in their own name and keep the remaining funds in the inherited IRA separate.



Submitted by BruceM on Fri, 2012-06-08 01:46

Thanks. That makes perfect sense.

BruceM



Submitted by Alan Spross on Fri, 2012-06-08 18:21

Well, we all agree but there might be another way to look at this as explained below.

The following is copied from the 2002 RMD Regs addressing how the spousal beneficiary can change an inherited IRA to owned status:

>>>>>>>>>>>>>>>
(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).
>>>>>>>>>>>>>>>

We already know directly from the tax code that for rollover purposes an IRA inherited from a spouse is not treated as an inherited IRA. Therefore, a distribution to the surviving spouse can be rolled over but does it always mean that the IRA account it is rolled to becomes an owned IRA if it was not already an owned IRA?

Pub 590, p 16 clearly says “YES”, and indicates that rollover contributions result in ownership just as regular contributions would. But I cannot locate anything in the tax code or IRS Regs that corroborate Pub 590. That leaves the copied paragraph above in the 2002 RMD Regs. Taking a close look at this wording, it appears that the additional amount contributed must be subject to the Sec 401(a)(9)(A) requirements. (A) refers to IRA accounts that are subject to RMDs of a living owner. Section 401a9B addresses RMD requirements after the owners death. The inherited IRA is therefore subject to (B), not (A) and the distribution from the inherited IRA is subject to B.

It also appears that if the intent of this paragraph was to change the inherited IRA to owned status, why would the wording put a condition on the additional amount contributed being subject to A when any contribution at all would change the IRA to owned status? And if the wording was referring to the IRA itself and not to the additional contribution itself, the IRA would already have ownership status before the contribution and the contribution would not affect that.

The distribution from the inherited IRA is subject to 401a9B, not 9A. That begs the question why that distribution could not be rolled back to the inherited IRA or to another spousal inherited IRA subject to B without changing that IRA to owned status? If so, then the wording used in Pub 590 is misleading.

Comments?



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