Spouses Treated Unfairly
It is generally believed (even by Congress, apparently) that spouses have advantages in being beneficiaries of IRAs and QRPs over non-spouses. That is probably true, IF they are over 59 1/2. Two areas in which they are not treated as well, however would be transfers to inherited IRAs from QRPs and withholding. PPA 2006 and its TCA 2007, completely ignored spouses in the law allowing transfers to inherited IRAs. Spouses must rely on a PLR, which some administrators refuse to follow. The second is in the are of withholding. Spouses are subject to the mandatory 20% withholding on distributions from QRPs, whereas non-spouses are not! If I am correct, it does not seem fair.
Permalink Submitted by Alan Spross on Wed, 2007-08-22 03:08
Of course, it could also be said that only spouses are eligible to rollover the DB, whereas the non spouse is limited to a direct transfer.
The rationale for mandatory withholding of 20% being required only for ERDs is probably related to the typical size of ERDs versus distributions that cannot be rolled over such as RMDs, SEPPs, and hardships. For these larger distributions that typically suggest a higher marginal bracket, the govt apparently wants to play it safe and get the 20% up front.
I do believe an opportunity has been missed if the code is not amended to document the inherited IRA spousal transfer, since PLRs formally apply only to the applicant. The PPA would have been a logical place to include it.