Inherited IRA for a spouse

Submitted by Bradley Bofford on Mon, 2015-04-20 14:55

I have a client, age 50, who lost her husband last year at age 53. He had a $350,000 IRA. The former advisor established the IRA as an Inherited IRA, instead of a Traditional IRA (which as spouse would be the case).
When questioned, the advisor said it was for using the IRA as an emergency reserves and allowing for waiver of 10% penalty. The client has sufficient non-IRA capital (approx. $700k) and does not need income at this point.

A couple of questions:
1. Aside from the rationale of an emergency reserves, are there any additional benefits to maintaining it as an Inherited IRA instead of a Traditional IRA.

2. Our operations department and a seasoned CPA, both looked into this and stated that if the registration is an Inherited IRA, the surviving spouse would still need to take RMD’s. Is this an accurate statement?

Thank you.



Submitted by Jose Morales on Mon, 2015-04-20 15:50

The only other benefit that I can think of is the possiblity of creditor protection at the state level.  As for RMDs, the spouse would not need to begin taking RMDs until the year in which the deceased would have turned 70 1/2.  There is no need to worry about having missed any RMDs because the account has been maintained as an inherited IRA, as there are still about 16 years left before an RMD would be needed if it was to be maintained as an inherited IRA.  If they wish to not maintain the account as an inherited IRA they can transfer or rollover the funds into an IRA in their own name at any time.

Submitted by Bradley Bofford on Mon, 2015-04-20 16:59

Thanks for your response.  My broker/dealer custodian, NFS, stated it is mandatory for all Inheirted IRA’s to distribute RMDs, whether spouse or not.  It sounds like that can be an internal policy.Also, the local CPA I work with stated that RMD’s are required if established as an Inherited IRA, instead of a Traditional IRA.Is it possible this can be the case and the surviving spouse would need to take the RMD’s, even as a spouse?

Submitted by Jose Morales on Mon, 2015-04-20 17:13

Have them read Publication 590-B, page 9 under “special rules for surviving spouse.”  It clearly states “If the owner died before the year in which he or she reached age 70 1/2, distributions to the spouse do not need to begin until the year in which the owner would have reached age 70 1/2.”  In the above scenario the owner would not have reached that year for about another 16 years.  They will need to take an RMD as a spouse, but not for about another 16 years if they choose to maintain the account as an inherited IRA.  If they move the funds into an IRA in their own name, they do not need to begin taking an RMD until April 1st in the year after the year in which they reach the age of 70 1/2.

Submitted by Alan - IRA critic on Mon, 2015-04-20 18:49

  • The surviving spouse must be the “sole designated beneficiary” of the IRA for the inherited IRA RMDs to be deferred until the deceased spouse would have reached 70.5. There might be some question regarding what is required to attain sole beneficiary status in certain situations, but that apparently is not the issue here. The operations Dept appears to have overlooked the sole spousal beneficiary rule, but either way a distribution should not be forced on the beneficiary. And even if it was improperly distributed, since it is not technically an RMD the surviving spouse could roll it over.
  • To avoid an RMD for the longest posssible time, the inherited IRA should be rolled over just before the calendar year the deceased spouse would have reached 70.5. That will give her another 3 years before RMDs must begin as owner.
  • There could have been a benefit of deferred RMDs if the sole surviving spouse beneficiary was older than the deceased spouse, but that is not the case here.
  • Note that the successor beneficairy loses their own stretch if the surviving spouse keeps taking beneficiary RMDs and does not roll it over when deceased spouse would have reached 70.5.  The successor beneficiary would then have to complete the current RMD schedule instead of receiving a re set received if they were the primary beneficiary.

Add new comment

Log in or register to post comments