Spouse Moves Deceased Spouse IRA & 401k to an Inherited IRA. Can it later then Be Moved to Spouse’s OWN IRA?
I’m new to the forum, so my apologies if this has been asked and answered frequently in the past.
My 77 year old client recently lost his 65 year old wife. She has a large IRA, and a large 401k.
1. Can each of the above be transferred to an Inherited IRA (registered like Mary Smith, IRA, Deceased 3/1/2021,FBO John Smith, Beneficiary) to keep him from having to take any withdrawals on any of this money for several years, and then before the year the deceased wife would have turned 72, can the husband at that time (several years from now) transfer this Inherited IRA account into his OWN IRA and then take normal RMD’s on that larger balance starting at that time?
2. If the above answer is “No”, would it make a difference if the deceased accounts are left completely untouched where they are now for about 6 years, and only then the surviving husband rolls them to his OWN IRA?
It would be greatly appreciated for any answers provided to only be provided if you are fully confident of the accuracy of the answer.
Thanks so VERY much, and have a nice weekend.
Steve Feiertag
Permalink Submitted by Alan - IRA critic on Fri, 2021-08-20 21:32
He can do as you asked as long as she was the sole beneficiary on these accounts. No beneficiary RMD will be required until the year she would have reached 72, and once that year arrives he should elect to assume ownership of the inherited IRA. His RMD that year will be lower if he elects ownership since that will enable him to use the Uniform Table. He could also directly transfer the newly owned IRA into his already existing IRA if he has one.
Although not necessary with the above response, it is never a good idea to leave an inherited account unclaimed for more than a year. If he were to pass, the accounts would then go to his estate and would be probate assets. There is also a risk that accounts left unclaimed for over 3 years could be escheated to the state, and in some states it is a real hassle to claim such property.
He should at least look into the possibility of NUA in the inherited 401k if she owned highly appreciated employer shares in the 401k. That option could be beneficial if the cost basis is low enough. He should also consider the long term tax impact of delaying the RMDs on these large accounts for 7 years. Filing single with huge RMDs in his mid 80s could result in a bad spike in his taxes in 7 years, and high IRMAA surcharges. Of course, he can still withdraw from the inherited IRAs sooner to somewhat level his taxable income, but he does not have to, nor will doing so trigger the start of RMDs. NUA could substitute lower LT CG rates while reducing future RMD income taxed at ordinary rates, but of course diversification should be top priority if too much employer stock.
He might also want to convert an incremental amount to a Roth IRA this year, the last year he will be filing jointly and able to convert at a lower rate. If he converts from the inherited IRAs (which a spouse can do), he would convert to an owned Roth, not an inherited Roth.
Permalink Submitted by Steve Feiertag on Sat, 2021-08-21 00:55
So in your point #1, he can now move the deceased spouses IRA and 401(k) into a new “Inherited” IRA, and then at any point before that 7th year, can then move all of that “Inherited” IRA to his “Own” existing IRA. Correct?
Permalink Submitted by Alan - IRA critic on Sat, 2021-08-21 01:23
Yes, that is correct. The inherited 401k is moved to an inherited IRA by a direct rollover, which is reported on a 1099R and on Form 1040, but is not taxable. The inherited IRA is moved by a non reportable direct transfer. He should use the above methods, and not receive an actual distribution, since a distribution can only be rolled over to his own IRA, and he would lose the inherited status, and become subject to current IRA RMDs.
Permalink Submitted by Steve Feiertag on Sat, 2021-08-21 01:59
Thanks.