Spousal assumption of inherited IRA when spouse is 50% beneficiary
Suppose Husband leaves 50% of his IRA to Wife and 50% to, say, Brother. Assume that Wife was fine with this and all proper consent documentation was on file.
According to Pub 590-B, a surviving spouse can treat the IRA as their own (i.e., “spousal assumption”) only if they are the sole primary beneficiary of the IRA (I am not sure why the spouse must be 100% bene, as you’d think the IRS would be OK with more money going to a non-spouse/non-EDB, as that would accelerate federal tax revenue. But I digress…)
If SS bene takes her 50% share and directly transfers as an inherited IRA to another custodian, would that new custodian typically track (or be able to track) that the SS was not a 100% bene on the account?
In other words, if the Wife in my hypothetical tells the new custodian that she wants to perform a spousal rollover, how would that custodian know that she was not eligible to do so?
Please and thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2021-05-11 21:11
That’s a good question that is rarely asked, and the IRS material does not clarify exactly WHEN the spouse is treated as a sole beneficiary. As you stated, once the spouse has transferred her share to an inherited IRA with only herself the beneficiary, is she now the sole beneficiary? Or is sole beneficiary determined on one date only, for each account on the DOD. This last interpretation seems the most likely, but enforcement does not appear to follow.
In your example, with the spouse having transferred her share of the inherited IRA to a separate account, I don’t get the impression that the IRA custodian is going to reject an assumption of ownership or ask for any beneficiary details for the original account at death. An associated issue is if the spouse fails to take a beneficiary RMD from the separated inherited IRA, does she still default to ownership of that inherited IRA? The answer is not clear from current IRS Regs.
Of course, the surviving spouse can still easily complete a spousal rollover to her own IRA by either a direct transfer or a 60 day rollover. The direct transfer does not count as a distribution for one rollover limit purposes, but the 60 day rollover does and therefore the spouse must be very careful in doing a 60 day rollover.
While electing ownership would not be structurally possible if there is another beneficiary at the time, the “sole beneficiary” determination also affects such rules as when beneficiary RMDs begin – not until the deceased spouse would have reached 72, but if the surviving spouse is not deemed the sole beneficiary beneficiary RMDs start in the year following owner’s death.