inherited IRA by spouse then change to spousal own Ira

Submitted by Robert J Andreola Jr on Sat, 2018-03-24 11:58

client spouse died 5 yrs ago. She took the deceased’s husbands IRA as inherited IRA. At time of death they were age 71. Can she now convert the Inherited IRA to her own IRA in order to reduce the RMD? Any special procedure to follow? What drawbacks?



Submitted by Alan - IRA critic on Sat, 2018-03-24 17:53

She should get this done ASAP. Should have elected to assume ownership right after inheriting as her RMDs have been much higher and the stretch for his own beneficiary would be impaired were she to pass. Best procedure now is to notify custodian that she is electing to assume ownership, confirm her beneficiary, and if she has her own IRA she could then move this IRA into her own by direct transfer. There are no drawbacks of electing ownership. Her RMD will be reduced starting this year as she can use the Uniform Table.

Submitted by david zolt on Sat, 2018-03-24 20:44

I have a similar situation.  About 5 years ago, age 66 spouse inherited age 65 husband’s fairly large IRA account.  Apparently, she was advised (and opted to) inherit the IRA rather that to rolling it over to her name in order to defer taking the RMD for one year.If she had rolled it over to her name, the first RMD would have been for 2017.  If she leaves it in the Inherited IRA the first RMD is for 2018, but for a much higher amount.My questions are:1)  Do you think the custodian (Vangaurd) will be amenable to tranferring the Inherited IRA to her tradional IRA?  Will they push back on this request?2) If the direct transfer goes through, what happens to the 2017 RMD?  Is it not required because it didn’t exist back then?  Or is it required and due by 4/1/2018?  If it’s due by 4/1/18, is it OK to take it before the transfer?

Submitted by Alan - IRA critic on Sat, 2018-03-24 21:39

  1. Vanguard does not have a choice. She should first advise VG that she has elected to assume ownership of the inherited IRA. It can then be transferred to a new owned IRA in a non reportable transfer or retained in the re titled IRA depending on Vanguard’s requirements. This avoids issues with the one rollover rule that may occur with a reported distribution.
  2. There is no 2017 RMD because the IRA was still in inherited status at the end of 2017. The 2018 RMD will be based on the 12/31/2017 value and her age as of 12/31/2018 in the Uniform Table. Therefore, the 2018 RMD will be lower as a result, and must be distributed by 12/31/2018. I assume she reached 70.5 in 2017 but did not own an IRA in 2017, so the RBD of 4/1/2018 is immaterial.
  3. Note that there is also a default rule which states that if she fails to take her full beneficiary RMD, she is deemed to have defaulted to ownership of the IRA for that year. By failing to complete the beneficiary RMD by 12/31/2018 her 2018 RMD is reduced to a Uniform Table RMD for 2018 but is still late so she would have to make that up and file a 5329 to request the penalty be waived for the late 2018 RMD..

Submitted by david zolt on Sun, 2018-03-25 16:04

Thanks, Alan.  That’s extremely helpful.  She also has a traditional IRA at Vanguard.  She took her first RMD from that IRA in 2017.  We’ll contact Vanguard and instruct them to transfer her Inherited IRA into her traditional IRA.  Am I correct in understanding that this transfer would not count as a rollover for the one rollover per year rule because it’s a trustee-to-trustee transfer?

Submitted by Alan - IRA critic on Sun, 2018-03-25 16:32

Yes, the TtoT transfer will not count as a rollover and will not be reported on a 1099R. 

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