Worth a shot: Client’s husband passed away in 2010. He was above RMD age. Client was under 59 1/2 so created inherited IRA to avoid 10% penalty. Is there any undoing this now that client is above 59 1/2? Can she change it to a spousal IRA now?
That is correct. As beneficiary of a deceased spouse over 70.5 in the past, she had to take inherited IRA RMDs each year except 2020. If she assumes ownership this year she will be treated as owning the account the entire year and that will eliminate the beneficiary RMDs. Her owner RMDs do not start until the year she reaches 72. Until then, she can take out any amount she wishes with no penalty, but will owe ordinary income tax.
Hi Alan. Client want IRS citing she can change from inherited IRA to spousal IRA at any time after death of husband. I read through the IRS 590 and couldn’t find it. Many Thanks
CFR 1.408-8 A-5(a) explicitly states, “The surviving spouse of an individual may elect, in the manner described in paragraph (b) of this A-5, to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if distribution thereof has commenced to the spouse) as the spouse’s own IRA.” https://www.law.cornell.edu/cfr/text/26/1.408-8
Note that, by operation of law, the deceased spouse’s IRA became an inherited IRA for the benefit of the surviving spouse immediately upon the death of the decedent. Retitling the inherited IRA as such is a formality and allows the custodian to record the surviving spouse’s information and beneficiaries. It doesn’t change the nature of the IRA as being an inherited IRA for the benefit of the surviving spouse so it doesn’t do anything that would prohibit the surviving spouse to treat it as their own at any time in the future.
Also see “treating it as your own” in IRS Pub 590-B where it lists actions (or inactions) that can cause the inherited IRA to default to owned status at any time, Implying that it can also be done explicitly at any time: https://www.irs.gov/publications/p590b#en_US_2019_publink1000230539
While client is concerned about assuming ownership of the IRA, note that there is also a default rule that states a failure to fully complete the annual RMD for the beneficiary IRA results in defaulting to ownership status regardless of the IRA still being titled as inherited. Since deceased spouse was over 70.5 upon his death, her beneficiary RMDs started in 2011, therefore the first year she fell short of the RMD, if any, she actually became the owner effective in that year. As owner, her RMDs would have stopped and do not start as the owner until the year she reaches 72. Therefore, it is very possible she is already the owner, but should have it retitled as such if that is the case.
Permalink Submitted by Alan - IRA critic on Tue, 2021-01-05 19:03
Yes. A sole surviving spouse has no deadline to either elect ownership of the inherited IRA or roll it over to their own IRA. It is common practice to retain the inherited IRA at least until reaching 59.5 so that distributions will not be subject to the 10% penalty. Therefore, she can and should elect to assume ownership of the IRA at this time, having reached 59.5.
Permalink Submitted by michael Allard on Tue, 2021-01-05 19:25
Thanks. And to confirm, since she is now 64 she has no obligation to take anything out, but can take whatever she wants.