Inherited IRA from Spouse
I have a 62 yr. old client who just passed away with two IRA accounts. His wife, age 51 is the sole beneficiary. I believe she has one of three options: (1) to treat it as her own by designating herself as the account owner; (2) to treat it as her own by rolling it over into her own IRA; or (3) treat herself as the beneficiary rather than treating the IRA as her own. By leaving herself as the beneficiary, she could take distributions from the acount(s) without incurring the 10% early withdrawal penalty. Here’s my question – if you go to IRS Pub 590, it mentions that an IRA inherited from a spouse will be considered as treating it as your own if you are the sole beneficiary of the IRA and you have unlimited right to withdraw amounts from it which is the case in this situation. SO – I don’t think I have the option of letting her treat it as a Inherited IRA and will be forced to treat it as her own or roll it over into her own. Please clarify if I am analyzing this correctly. Thanks !!!
Permalink Submitted by Alan Spross on Tue, 2010-02-16 23:02
No, you are not interpreting p. 18 of Pub 590 correctly. The point is that an inherited IRA will not default to an owned IRA by making contributions or failing to take RMDs unless the surviving spouse is the sole beneficiary. If there are other beneficiaries, the spouse cannot become the owner of that inherited IRA.
In your case, the spouse is the sole beneficiary, and can elect to continue to treat their interest as a beneficiary. That will allow her to take distributions as needed without penalty, but her RMDs do not start until the year her husband would have reached 70.5. By that time she will be 59.5 and can assume ownership of the IRA and avoid RMDs for 11 years. There are advantages then if she needs money without penalty, but still does not HAVE to take RMDs yet.
Permalink Submitted by Al Fry on Wed, 2010-02-17 19:56
She can also use the King Soloman approach; part into an inherited ira and part into her own IRA. The part into her own IRA gives her IRA beneficiaries better stretch options, if they are younger than her.
Permalink Submitted by Alan Spross on Wed, 2010-02-17 20:13
But in this case where the deceased spouse passed prior to age 70, the sole spouse beneficiary is treated as the IRA owner until the year that the deceased spouse would have turned 70.5. That is another 8 years or so. If the survivor passes in the meantime, she is treated as the IRA owner and her successor beneficiaries still get a full stretch. (Ref Pub 590, p 36). But this changes on Jan 1st of the year deceased spouse would have hit 70.5, which is also the same year that she would have to begin beneficiary RMDs.
At that point she should take out enough to tide her over for the few months left until she hits 59.5. These are penalty free distributions. Then she should roll over the rest to her own IRA or just have the IRA re titled. That eliminates her RMDs until her own RBD, and any funds she needs will be penalty free in the meantime with her designated beneficiaries getting the full stretch.
The key is flagging the account to remind her or her planner when this date will occur.
Permalink Submitted by Al Fry on Thu, 2010-02-18 03:27
Alan – So you are saying even though she takes it as an inherited IRA (penalty free withdrawals), if she dies in the next 8 years it is teated as if it was her own IRA for stretch purposes?
Permalink Submitted by Alan Spross on Thu, 2010-02-18 05:00
Yes. The provision is probably there as a companion benefit to go along with the delay of the start of RMDs because it runs concurrently with the period that RMDs as a beneficiary do not have to be taken out. It prevents the survivor from assuming ownership to protect their beneficiaries as well.
This is part of the provision that does NOT apply to the surviving spouse of a surviving spouse. So if the first surviving spouse passes after remarrying, the remaining spouse is NOT treated as owner and their beneficiaries are successor beneficiaries rather than designated beneficiaries, meaning that the IRS gets its tax money a little sooner.
Permalink Submitted by Al Fry on Thu, 2010-02-18 15:00
So in this case the periods coinside. If the deceased husband was 51, and the surviving (first) wife 45, there would be no reason for the her to convert the Inherited IRA to herself until he woud have been 70.5, and she 65.5, unless she wanted to make contributions to it.
Permalink Submitted by Alan Spross on Thu, 2010-02-18 20:58
RIght. In the 51 and 45 scenario, no harm done if she waits until 65.5. But there is also no harm done if she assumes ownership at 59.5.
So assuming ownership has a downside prior to 59.5 and NOT assuming ownership has a downside after 65.5. Between those two years the result is the same, ie no penalty, no RMDs, and full stretch for successor or designated beneficiaries.
Permalink Submitted by Al Fry on Thu, 2010-02-18 22:27
TKU, Alan
Permalink Submitted by Paul Edmunds on Fri, 2010-02-19 10:55
Alan – I’m the one who posted the original question. What I did not mention is that there were no contingent beneficiares named by the deceased husband, only his spouse as the 100% primary beneficiary for the two IRA accounts. If the wife (beneficiary) leaves one of the accounts in the husband’s name and does not change it over to her own, is she allowed to name her own successor beneficiares before she makes it her own IRA? Or, if she died before changing to her own IRA, would the remaining funds revert back to the husband’s estate because he did not name any contingent beneficiaries? Thanks !!!
Permalink Submitted by Al Fry on Fri, 2010-02-19 15:54
She needs to name her own benes. His contingent benes (or lack threof) are no longer relevant, unless she were to disclaim the IRA.
Permalink Submitted by Alan Spross on Fri, 2010-02-19 18:00
Alfry is correct, she should name her own beneficiary ASAP.
If she did nothing and then passed:
1) Original contingent beneficiares named by husband are void.
2) IRA agreement would indicate who the default successor beneficiary would be, most likely her estate.
3) If it is her estate, her will would then determine where the estate would distribute the funds; if no will then state intestate provisions apply
4) Since surviving spouse is treated as the owner and does not have an individual beneficiary, the 5 year rule would apply to the estate beneficiaries.
Nothing would revert back to the husband’s estate.