Spousal IRA BDA Situation

Submitted by Kevin O'Hearn on Tue, 2021-02-02 19:24

Hello, I am currently working with one of our advisers on and issue with a spousal inherited IRA issue and I want to see if I could get your feedback:

Husband died in 2017 (pre-RBD) and wife inherited his IRA. Wife (currently 52) moved the assets $100,000 into a BDA IRA. Based on a conversation with a member of my team, advisor told the client she could do a 60 day rollover from the BDA IRA and she took a $60,000 distribution on 12/7/20.

The question now is whether we can partially cure this error by doing the following:

1. Get an LOI from the client indicating that she wants to treat the inherited assets as her own and thus move them into a spousal rollover (what is the process for this? And, in cases where this happens, do we require that the full balance $100,000 of the inherited IRA be shifted to a spousal rollover account?)
2. Open a Traditional IRA for the client to receive the BDA assets
3. Re-deposit the $60,000 distribution to the new spousal rollover account by close of business on 2/5 (60 days from distribution date)

Any guidance would be much appreciated. Thank you.



Submitted by Alan - IRA critic on Wed, 2021-02-03 00:00

Yes, she can do a 60 day rollover to her own IRA as long as she has not used up her one rollover for the last 12 months. Looks like she still has 40k in the inherited IRA to draw from without penalty until 59.5. She cannot roll the 60k back into an inherited IRA. 

Submitted by Heather Zack on Wed, 2021-02-03 13:57

Thanks! Do you have reference to the applicable code Section (presumably under 408) or Treasury Reg? My concern is that the below Kitces article seems to imply that treating any portion of the BDA IRA as a spousal rollover (by effecting a 60 day rollover, which is only permitted in a spousal rollover), the remaining balance in the BDA will de facto be treated as a spousal rollover: https://www.kitces.com/blog/spousal-rollover-stretch-ira-inherited-traditional-roth-401k-rmd/ “However, it’s crucial to recognize that under IRC Section 408(d)(3)(B), an inherited retirement account is not eligible to be “rolled over” to an IRA, where the recipient takes a distribution and re-contributes it to a rollover account within 60 days, unless it is being done as a spousal rollover. In other words, while “regular” retirement accounts can be distributed and subsequently rolled over, once an inherited retirement account is distributed, its treatment as an inherited retirement account ends irrevocably and cannot be unwound and “put back”, which means the spouse must complete a spousal rollover (and face potential early withdrawal penalties if under age 59 ½) or simply report a taxable distribution immediately, and a non-spouse beneficiary is entirely “stuck” with an irrevocable (taxable) distribution.  Notably, this doesn’t prevent inherited retirement accounts from being moved to other financial institutions. But it means the move must be done as a trustee-to-trustee transfer of the inherited retirement account, with the transfer payable directly to the properly titled inherited account at the new IRA custodian. (This is also why it’s necessary to re-title the account as inherited before transferring it – because the receiving custodian will want to register the account as inherited, and the transferring custodian typically won’t release it if the receiving account has a different registration.) A true “rollover” – where funds are actually distributed as a check payable to the owner, who cashes the check, and then writes a new check to “roll over” the funds to a new IRA – is only permitted for an individual’s own IRAs, and not an inherited IRA (unless the inherited IRA becomes a spousal rollover account).”

Submitted by Alan - IRA critic on Wed, 2021-02-03 18:26

I don’t see any conflict with the Kitces article. He is not saying that a partial spousal rollover cannot be done, although that actually was the case prior to 2002. But once a distribution is taken from an inherited spousal IRA, it can be rolled over to that spouse’s own IRA including a Roth IRA, but cannot be returned to the inherited account or any inherited account again.  Kitces is saying that the amount distributed is subject to these limitations, not the amount that was never distributed. The 60,000 distributed can be rolled over subject to the one rollover limitation without changing the status of the 40,000 that was never distributed and remains in the inherited IRA. In other words, the spousal rollover is not an all or nothing choice unless the spouse assumes ownership without taking a distribution. In that case the entire account loses inherited status. But taking a distribution  as was the case here does not change the portion of the inherited account that was not distributed. Granted, Sec 408 is less than clear on this issue.  The following is copied from the IRS 2002 RMD Regs:
“Q-5. May an individual’s surviving spouse elect to treat such spouse’s entire interest as a beneficiary in an individual’s IRA upon the death of the individual (or the remaining part of such interest if distribution to the spouse has commenced) as the spouse’s own account? A-5. (a) 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. ”
 

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