Does My Inherited IRA Qualify for a QLAC?

By Joe Cicchinelli and Beverly DeVeny
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Can an inherited IRA qualify for a QLAC (qualified longevity annuity contract)? Can I use my Roth IRA to pay for my grandchildren to go to college? These questions and more are answered in this week’s Slott Report Mailbag, proudly sponsored by Goldco Precious Metals. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

I inherited IRAs from my deceased husband. I was told that inherited IRAs do not qualify when determining total IRA value for QLACs (qualified longevity annuity contracts).  My question is: are IRAs considered inherited when from the spouse?

Answer:
Assuming you don’t make your deceased husband’s IRA your own IRA (spousal rollover or transfer), inherited IRAs don’t qualify for a QLAC. However, if you do a spousal rollover from the inherited IRAs to an IRA in your own name, then you can buy a QLAC.

2.

If all or a portion of an IRA is pledged on a loan, but not withdrawn, does the income that is triggered create basis in the IRA or is that amount taxed again when withdrawn?

Answer:
The amount that is pledged on a loan is considered a taxable distribution in the year it was pledged and subject to the 10% early distribution penalty if you are under age 59 ½ because it is a prohibited transaction in an IRA. There is no way to correct this. IRS has not ruled on whether any income generated on amounts not allowed in an IRA would be considered basis or even if they are allowed to remain in the IRA.
 

3.

We regularly watch Ed Slott’s PBS programs and receive your newsletters.  A question prompted by current dilemma and today’s article, “3 Reasons to use Roth . . .for Education Savings.”  We have two grandchildren – boy older and girl younger. We have declined 529 plan contributions because boy at 15 years old is not interested in anything (beside video games on IPhone), and we think not college material. Girl is sharp, sharp. We know a 529 could be transferred from boy to his sister, but that would not be fair to him, as probably he will need money for something, but maybe not college. We have a decent Roth IRA, currently to be split between our sons, per stirpes for the son (father of grandchildren.)

Your article tells me that our Roth does not “qualify;” rather, you identify the father’s Roth (non-existent) in the article. So, how could we use our Roth to help both grandchildren appropriately before we die and pass it on? 

Answer:
The accumulated amount of anyone’s annual Roth IRA contributions can be used for any purpose at any time during your lifetime. That includes using the money for your grandchild’s college.

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This week’s Slott Report Mailbag is sponsored by:
GoldCo Precious Metals
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