Unique Situation with Inherited IRA and Large NOL

Submitted by Brian Devers on Mon, 2017-08-21 19:14

Husband, age 60. died unexpectedly with good chunk in employer’s 401k.
– Wife was under 59 1/2.
– Rolled to inherited IRA in case it was needed, which she thought would be the case, plus 401k funds were horrible
– wife took a distribution as she thought money was going to be needed.
– she did not need, got it back within 60 days.
– wife is turning 59 1/2 very shortly

Large NOL has arisen, and we’d like to take advantage by converting the IRA to Roth dollars.

Question 1: rolling the inherited IRA to an wife’s IRA not feasible due to ‘one rollover per year’ rule?

Question 2: can we establish an Inherited Roth IRA and move funds to and not violate ‘one rollover per year’ rule?



Submitted by Alan - IRA critic on Tue, 2017-08-22 00:33

  1.  This can be done without a distribution and rollover by having the spouse first assume ownership of the inherited IRA and have it retitled. There should be no 1099R or 5498 for that. Then immediately do a non reportable direct transfer to a new TIRA titled with her as owner. Be sure there is no distribution check issued to her as that would result in the second disallowed rollover within 12 months.
  2. Following step 1 she can simply convert to her own Roth IRA. Once she reaches 59.5 all conversion money will be accessible without penalty or taxes, although if this is her first Roth IRA, it will not be fully qualified until 2022. 
  3. Not sure when she reaches 59.5, but all transactions done before then and some done afterwards are dicey, so she should not be taking any IRA distributions untill she checks with you. 
  4. The 12 month period before she qualifies to do any 60 day rollovers (conversions do not count) starts on the date she received that prior distribution that was rolled back. So she needs to be very careful.

 

Submitted by David Mertz on Tue, 2017-08-22 00:40

  • What is meant by “got it back within 60 days?”  A rollover back to an inherited IRA is not permitted.  Since this is an IRA inherited from a deceased spouse, rolling the money back into the inherited IRA would, by operation of law, result in the inherited IRA defaulting to being an IRA owned by the wife.  (The wife is deemed to have made the election to treat the inherited IRA as her own.)  It would no longer be an inherited IRA and would need to be retitled (without distribution) to reflect that it is now an IRA owned by the wife.
  • Regardless of whether the rollover that “got it back within 60 days” was back to the original account or to a different account, one owned by the wife, this rollover counts as a rollover for the purpose of the one IRA-to-IRA rollover per year rule, resulting in the wife not being eligible to roll over any other IRA distribution made before 12 months have elapsed since the distribution from the inherited IRA was made.
  • Whether the inherited IRA has defaulted to being owned or not, that IRA can be retitled with the wife as owner or moved by trustee-to-trustee transfer to an IRA in the wife’s own name.  Retitling or a trustee-to-trustee transfer is neither a distribution nor a rollover and is therefore disregarded with respect to the one rollover per year rule.
  • A Roth conversion from an inherited traditional IRA to an inherited Roth IRA is not permitted.  As Alan said, a Roth conversion from this inherited IRA would have to be to the wife’s own Roth IRA.

Submitted by Alan - IRA critic on Tue, 2017-08-22 02:14

DMx, I think that the spousal inherited IRA distribution can be rolled back to the same spousal inherited IRA per final statement under Sec 408(C)(ii):

(ii) Inherited individual retirement account or annuityAn individual retirement account or individual retirement annuity shall be treated as inherited if—(I)the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and(II)such individual was not the surviving spouse of such other individual.

Submitted by David Mertz on Tue, 2017-08-22 13:38

With regard to section 408(d)(3)(C)(ii), it’s not clear to me if this definition applies only in the context of rollovers or defines inherited IRAs in general.  To me, it seems inconsistent that you could treat an IRA as an inherited IRA for the purpose determining RMDs under section 401(a)(9)(A) and early-distribution penalties but not as an inherited IRA for the purpose of allowing rollovers to the IRA.  I refer to IRS Pub 590-B page 5:

You will be considered to have chosen to treat the IRA as your own if:

  • Contributions (including rollover contributions) are made to the inherited IRA, or
  • You do not take the required minimum distribution for a year as a beneficiary of the IRA.

derived from CFR 1.408-8 Q&A-5(b):

…, a surviving spouse eligible to make the election is deemed to have made the election if, at any time, either of the following occurs – (1) Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B); or (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).

The question, though, is whether or not a rollover back to the same inherited IRA is considered to be an additional amount contributed.  By not explicitly excluding such a rollover from rollovers in general, Pub 590-B suggests that it is indeed an addition.  A rollover is certainly a contribution and it adds to the amount in the inherited IRA immediately prior to the rollover contribution.  From this I conclude that an inherited IRA can never receive any rollover contribution.  But it really doesn’t matter in this case since the desire appears to be to have the IRA be an owned IRA anyway.

Submitted by David Mertz on Tue, 2017-08-22 14:57

Further, I believe that section 408(d)(3)(C) defines *distributions* that are elgible for rollover (or not), not the account to which a rollover is permitted.  I also believe that contributions are only permitted to be made to an IRA by the IRA owner or on behalf of the IRA owner.  The spouse is the beneficiary in this case, not the owner; a rollover to this account by the spouse would not be a rollover on behalf of the IRA owner unless the spouse made the election to treat the account as the spouse’s own (consistent with CFR 1.408-8 Q&A-5(b) and Pub 590-B).

Submitted by Alan - IRA critic on Wed, 2017-08-23 03:51

  • OK, that makes sense. In other words, a distribution from a spousal inherited IRA can be rolled over, but only if the rollover contribution changes the character of the receiving IRA account to an owned IRA by the surviving spouse, therefore an automatic election of ownership. Such a rollover should be reported by the custodian as a rollover contribution on Form 5498. If the OP actually rolled the distribution back to the inherited IRA, the custodian should have then retitled it as an owned IRA account. I wonder if that happened.
  • That would still exhaust the only permitted indirect rollover for 12 months.

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