Rollover of IRA and 403b funds to an Inherited IRA

Submitted by Matt Groome on Fri, 2015-02-13 17:26

I am helping a client do direct custodian-to-custodian transfers to an Inherited IRA, of her portion of her deceased father’s IRA and 403b accounts. The destination custodian in Charles Schwab. Schwab is telling me that IRS regulations do not allow co-mingling of these two types of funds. They are telling me me have to open separate I-IRA’s for each source/funds and cannot merge them at any point thereafter. Having multiple I-IRA’s will of course complicate the future distributions process and I would like to help the client avoid this if possible.

Further, Schwab’s position seems counterintuitive since we could get both the IRA and the 403b funds into one I-IRA if we first have the client/beneficiary rollover her IRA and 403b funds into I-IRA’s at the current account custodians, as a mere temporary measure prior to the subsequently transferring the two separate I-IRA accounts into one at Schwab.

When asked for explanation, Schwab merely refers me to IRS Publication 590 to understand why it can’t allow the co-mingling of the IRA and 403b funds. Can anyone provide guidance on Schwab’s rationale and direct me to relevant regulations? Thanks.

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Permalink Submitted by Alan - IRA critic on Fri, 2015-02-13 18:23

There is no IRS rule that prevents combining these transfers into a single inherited IRA, however Schwab may have a policy of avoiding this combination on the chance that the RMD divisors for the 403b and inherited IRAs are not the same. This could happen for any number of reasons such as possible different RBDs for those plans, different multiple beneficiary possibilities or delayed creation of separate inherited accounts for one and not the other. One of them might also have been previously inherited, or the inherited IRA might include basis and the 403b no basis. Schwab would have to know the entire history of these accounts to determine if they would actually have the same RMD divisor. You won’t find this directly explained in Pub 590. If a merged inherited IRA comes from two sources with different divisors, the beneficiary will have to use the lowest divisor (highest RMD) on the entire account. Schwab may just be trying to avoid complications which is a valid concern, but the IRS does NOT indicate anywhere that the accounts could not be combined.
Note that if the inherited IRAs remain separate, the RMDs can still be aggregated if inherited from the same decedent. An RMD can be aggregated even when the divisor is different for technical reasons. That would allow beneficiary to satisfy the total RMD using just one of the inherited IRAs.