Inherited IRA Question
I have a client who is under 59 1/2. Her husband passed away, he was also under 59 1/2. Before she came to see me she went ahead and had the IRA moved into her name. I know the only way for her to take withdrawls is to have it in an Inherited IRA. Did she ruin this opportunity. Her custodian is telling me that it can be moved to an Inherited IRA from her IRA…but I am not that trusting. Thanks in advance.
Permalink Submitted by Jose Morales on Thu, 2015-06-11 15:56
If the custodian knew what they were doing they wouldn’t have made the claim that after a spousal assumption of an IRA they can return the funds to an Inherited IRA at their leisure, because that is most certainly not allowed. Because the custodian either doesn’t know what they are doing, or knows that there is a very good chance they can get away with making the change, your client may “benefit” in this situation…if the IRS never finds out what happened. It’s up to the client to decide if that is a chance they are willing to take.
Permalink Submitted by Alan - IRA critic on Thu, 2015-06-11 19:05
Rolling over an inherited IRA to their own name before age 59.5 is a very common error made by surviving spouses. If they need distributions for support they are then forced to start a 72t plan (aka SEPP) in order to exempt themselves from the early withdrawal penalty. These plans are rigid and risky because if the taxpayer makes an error, they will owe retroactive penalties and interest on all the distributions taken under the plan. These plans must continue to the longer of age 59.5 or 5 years from the date of the first distribution. The longer the plan runs, the greater the risk that something will cause the distribution to be insufficient to meet expenses, and that is when these plans are busted. In some cases, the surviving spouse may have recourse against an advisor who recommends a IRA rollover instead of retaining the inherited IRA until 59.5.