Misc. IRA Questions

Submitted by Jason Hochstadt on Mon, 2016-08-08 14:58

Hello,

1. Is there any reason not to combine Roth IRAs (contributions only) with Roth IRA conversions (converted from Traditional IRAs) once the Roth IRA conversion re-characterization period passes w/o any re-characterization having taken place?

2. If a spouse with a Trad. IRA dies, until the remaining spouse takes ownership of the IRA presumably there is nothing to be done beneficiary-wise, because unless and until the remaining spouse takes ownership, the stretch would be lost for future generations in the event the remaining spouse were to pass (if the deceased spouse’s IRA remains in-tact or even if it’s transferred to the remaining spouse in an Inherited IRA). Is this correct?

Also, I assume it’s preferable for the remaining spouse to take ownership of the deceased spouse’s IRA via a direct trustee-to-trustee transfer into the remaining spouse’s IRA (as opposed to establishing a new IRA to the extent there would be no change in beneficiary designations or even a rollover).

3. Finally, I keep reading about IRA beneficiary trusts being so unique in terms of their drafting. For clients naming a Trust as IRA beneficiary:

A. Is it preferable to have such Trust(s) prepared during life (inter-vivos) for one or more beneficiaries (as applicable), OR referenced w/in one’s Last Will or Revocable Living Trust and created on a testamentary basis? Would the latter be better because if the former is prepared, what if changes in Trust language occur over time that never get reflected in a Trust created presently?

B. Does the answer to the above change whether the Trust is Conduit or Accumulation in nature?

C. If one of the beneficiaries has special needs, is it possible for the Trust as beneficiary of the IRA to incorporate/include special needs language that is not incorporated w/in the other Trusts?

Thank you.

Jason



Submitted by Alan - IRA critic on Mon, 2016-08-08 17:53

  1. No reason, although you still need to track the amounts and years of each conversion
  2. Surviving spouse still needs to re title the IRA as inherited or owned because they cannot name their own beneficiary until this is done. With no beneficiary, if surviving spouse passes the IRA would go to the estate. If the owner passes prior to RBD and spouse is the sole beneficiary, beneficiary RMDs do not begin until the year the decedent would have reached 70.5. If surviving spouse passes before first RMD is due, their successor beneficiary is treated as if the surviving spouse was the owner, ie they get their own life expectancy stretch. If surviving spouse passes after that date without becoming the owner, then the successor beneficiaries must continue surviving spouse’s RMD schedule. Sole surviving spouse can take ownership by a distribution and rollover or transfer into an existing owned IRA, by making a contribution to the inherited IRA (if eligible), or by default caused by failing to take an RMD required as the beneficiary. By doing the direct transfer rather than a rollover, there is no RMD distribution for the year of death or otherwise, and that has it’s own implications.
  3. A.)  As I understand it, the trust is drafted within the will, not just specified in the will. But it does not take effect till after the trustor passes. Therefore, certain changes required in trust provisions would have to be updated by the trustor. The testamentary trust is not drafted from scratch after trustor passes. Fees would probably be lower during trustor’s lifetime, however this may be partially true due to economies of drafting the will and testamentary trust together and having a combined fee. These are supposed to be more beneficial for small estates, as some fees are paid by beneficiaries rather than the trustor.   B)  Probably not.  C) If a beneficiary has special needs, a separate SNT should be drafted, the IRA partitioned, and the SNT be listed as the beneficiary for the IRA intended for the special needs beneficiary.
  4. These are my impressions, subject to comment from Bruce Steiner, an estate attorney who posts here.

Submitted by Jason Hochstadt on Mon, 2016-08-08 20:29

Hi Alan, Thanks for your reply.  Just 2 follow-ups:1. If surviving spouse (Husband age 80) retitled the deceased spouse’s IRA (who was 78) in an Inh. IRA (not his own), once the Husband passes wouldn’t his beneficiaries have to take distributions over his remaining life expectancy – rather than theirs [which would not be the case if he were to take ownership od the deceased spouse’s IRA]?2. You wrote that, “By doing the direct transfer rather than a rollover, there is no RMD distribution for the year of death or otherwise, and that has its own implications.”  Assume the 2016 RMD’s for the wife’s IRA were taken already.  Why does it matter whether her IRA is (a) transferred directly into the Husband’s existing IRA or (b) distributed and rolled-over?  Why wouldn’t either accomplish the same thing?Thank you.     Jason 

Submitted by Alan - IRA critic on Mon, 2016-08-08 21:09

  1. Yes, in this situation the husband should roll over the IRA to his own ASAP so that his beneficiaries would get their own life expectancy stretch when he passes and not be treated as successor beneficiaries. The rollover would also reduce his RMDs compared to an inherited IRA RMD. If husband continued RMDs as beneficiary, they would be based on the remaining life expectancy of his wife (78) since she was younger, but those RMDs would still be higher than rolling it over and then using the Uniform table.
  2. In this case, with the year of death RMD already completed, it would not matter whether the transfer was direct or the owned IRA was done by rollover. The result would be the same other than the rollover would have to be reported on Form 1040 and could therefore limit rollovers for the next 12 months. A direct transfer would not have to be reported and would not limit later rollovers.

  

Submitted by Jason Hochstadt on Mon, 2016-08-08 21:46

Hi Alan,Thanks for the reply.  In terms of #2, the deceased spouse has IRAs at 2 different custdoians.  For one of the custodians they already performed a rollover to the remaining spouse’s IRA maintained w/ them.  Since the IRA was rolled over directly into the Husband’s IRA, presumably this is considered a direct trustee-to-trustee transfer as opposed to a rollover since no check was made payable to the husband (everything was transferred in-kind). Is this correct?  I want to make sure not to run afoul of the 1 rollover limit every 12 months – although if each IRA maintained w/ both custodians is transferred directly into the Husband’s IRA (even if termed a Rollover), wouldn’t this be permissible?  Thanks again!

Submitted by Alan - IRA critic on Tue, 2016-08-09 00:45

  • Yes, what was done was a non reportable transfer and would not be considered a rollover. There should be no 1099R reporting this. Popular useage often refers to changing the assets from an inherited IRA to an owned IRA for the spouse as “the spousal rollover” even when executed as a non reportable transfer.
  • When the IRS changed their interpretation of the “one rollover limitation” to apply to all IRA accounts, as in the past there was no exception stated for a former inherited IRA , where the surviving spouse is changing the status from inherited to owned. The inherited IRA falls under the surviving spouse’s SSN, and therefore it is best to assume that this is treated for rollover purposes just like owned IRAs, and therefore could fall afoul of the new one rollover limitation. Best to do this change by direct transfer to avoid the 1099R and being considered a rollover. I have been waiting for someone to report that a surviving spouse who had used up their one rollover with an IRA of their own and then did an indirect rollover of the inherited IRA, was considered by either the IRA custodian or the IRS as having a taxable distribution since the one rollover had already been used. But fortuneately, no reports of this so far, although there is no doubt that this has been done probably thousands of times by now. Since the IRS has no authority to make exceptions for the one rollover rule, maybe they are going soft on enforcement so far, but no reason to roll the dice.

Submitted by Jason Hochstadt on Tue, 2016-08-09 15:10

Hi Alan, As a follow-up to the above, the one brokerage firm, ML, is stating that distributions because of death (rolled over from the decased spouse’s IRA into the remaining spouse’s IRA) is considered a Spousal Rollover and will trigger a 1099R, coded 4 as a Death Distribution. ML is stating that trustee-to-trustee transfers are done with the same name accounts (which was not my understanding of the rules as I’ve effectuated plenty of trustee-to-trustee transfers for Inherited IRAs, for instance – which cannot be rolled over in fact).  Additionally, they are stating that the deceased wife could have had multiple IRA’s and the remaining spouse could transfer each of them into his IRA w/o tax consequences – which I would agree with provided a direct trustee-to-trustee transfer.Can you please comment on the above?  Is there also a distinction because a Spouse may do a rollover of a deceased spouse’s IRA (which a non-spouse can’t do)?Also, we know that a Direct Rollover is different than an Indirect Rollover.  Is the once/year rule really only for Indirect Rollovers (where a check is cut to the remaining spouse to be deposited into his IRA), and not for Direct Rollovers which get transferred on a trustee-to-trustee basis directly into the remaining spouse’s IRA?Thanks.   Jason

Submitted by David Mertz on Tue, 2016-08-09 17:29

  • If a distribution is made, yes, it would have to be reported with code 4 on Form 1099-R.  However, if the surviving spouse’s interest in the inherited IRA is moved to the surviving spouse’s own IRA by trustee-to-trustee transfer, it is neither a distribution nor a rollover and is therefore not reportable.  Movement by trustee-to-trustee transfer is essentially the same as the surviving spouse designating the inherited IRA as being the surviving spouse’s own (non-reportable) and a subsequent trustee-to-trustee transfer of the surviving spouse’s own IRA (also non-reportable).  Also, a trustee-to-trustee transfer of an inherited IRA to the surviving spouse’s own IRA is essentially the same process as a transfer incident to divorce, which the instructions for Form 1099-R explicitly indicate is a non-reportable transfer (and, in fact, can only be done by non-reportable transfer), not a distribution and rollover.
  • The deceased owner’s IRA agreement would indicate whether or not a trustee-to-trustee transfer is permitted from the IRA; the Internal Revenue Code does not require that the custodian allow trustee-to-trustee transfers although most agreements do permit such transfers.
  • If performed as a reportable distribution and rollover, it would consume the one rollover permitted in a 12-month period.  If multiple inherited IRAs were to be moved to the surviving spouse’s own IRA within a 12-month period, no more than one could be moved by reportable distribution and rollover.  The rest would have to be moved by non-reportable trustee-to-trustee transfer.

Submitted by Alan - IRA critic on Tue, 2016-08-09 17:41

  • IRS Pub 590B and the 1099R Inst. fail to clarify the question of reporting the movement of funds by direct transfer, so it is to be expected that custodians will interpret the guidance differently. Note that if a check is made out to the custodian of the owned IRA of the surviving spouse and not to the surviving spouse personally, this qualifies as a direct transfer. So while direct transfers are clearly not to be reported on a 1099R or a 5498, a distribution to the beneficiary or owner must be reported on both a 1099R and a 5498. ML has decided to report all movement of funds from a spousal inherited IRA to an owned IRA as a distribution, no matter how it is physically done. Other custodians may not report it. I have no idea which interpretation is more commonplace, but this lack of guidance is bound to cause confusion.
  • Moreover, the reporting that ML is doing will substantially increase the exposure to the surviving spouse to violation of the new one rollover limit interpretation. Picture this scenario – wife moves a CD IRA by receiving a check and hand carrying it to a new bank. That’s a rollover. Shortly thereafter her husband passes and leaves his IRA to her. Under the ML interpretation, she cannot acquire ownership of the account until 12 months have passed because she cannot do a second rollover flagged by a second 1099R and reported on her tax return. Therefore, she must maintain the IRA as inherited until the 12 months has passed. She might have a very narrow window to then roll it over to avoid any RMD implications of having an inherited IRA for another year.
  • As you stated, this is not a problem with a non spouse inherited IRA since the death benefit cannot be rolled over in any event. And it is not a problem with a spousal inherited QRP since all direct rollovers from a QRP must be reported on a 1099R in all cases. This leaves only a spousal inherited IRA as a question mark, and since there are several different ways for the surviving spouse to acquire ownership (actual rollover, transfer, default by not taking beneficiary RMD, making a contribution to the IRA by regular contribution if eligible or a rollover contribution from any retirement plan, changing the title of the IRA without a distribution, etc.) there are several situations that may produce a different interpretation about the 1099R from others. It is all quite a mess. Perhaps you can ask ML about my prior example where the surviving spouse did a rollover just before inheriting her spouse’s IRA. Does this mean she cannot do a rollover because they will issue another 1099R?
  • Strangely enough, I never hear of any problems resulting from this confusion. But it would be very helpful if the IRS could clarify this question.

Submitted by Jason Hochstadt on Tue, 2016-08-09 17:51

Hi Alan & DMX, Thanks for the replies!  The only thing to clarify is the deceased wife’s IRA is not an Inherited IRA; it was hers and is still in that IRA.  The Husband has not set up an Inherited Spousal IRA; the plan would be for him to do a trustee-to-trustee transfer of his deceased wife’s IRA into his IRA.  This is what ML is stating is a spousal rollover and will produce a 1099-R even though not taxable (and even though I believe the funds would be transferred directly from ML Wife IRA to ML Husband IRA).  Not sure if this changes the responses from either of you above since you both referenced an Inherited IRA.My concern is that there is a separate IRA at a different custodian (Pershing) and even though I’ll ensure that gets done on a direct trustee-to-trustee transfer basis, I would want to keep track for record keeping purposes how ML is categorizing this for the IRA maintained there.  Also, isn’t it incorrect when ML claims that trustee-to-trustee transfers are done only w/ same name accounts?Thanks! 

Submitted by David Mertz on Tue, 2016-08-09 20:21

  • A “spousal rollover” implies that there was (or will be) a distribution.  But the inherited IRA does not *have* to be moved to the surviving spouse’s IRA by distribution and rollover, it can be moved by non-reportable trustee-to-trustee transfer (or as Alan mentioned, can become the surviving spouse’s own IRA by default such as when an RMD as beneficiary is not fully satisfied, with no action by the surviving spouse or the custodian at all).  See Q&A-5 of CFR 1.408-8:  https://www.law.cornell.edu/cfr/text/26/1.408-8
  • In referring to an “inherited IRA,” this can mean the account originally opened by the owner from which no transfer or distribution has yet been made, or it can mean a new account to which such account has been moved by trustee-to-trustee transfer, titled in the name of the original owner for the benefit of the beneficiary; the latter is sometimes also referred to as a Beneficiary IRA.  However, moved or not, they are really the same because upon the death of the owner the original account automatically becomes maintained for the benefit of the beneficiary(s) by operation of law.
  • A transfer incident to divorce is an example of an explicitly non-reportable trustee-to-trustee transfer from an IRA in the name of one individual to an IRA in the name of another individual, so one cannot say that trustee-to-trustee transfers are done only with same-name accounts.

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