inherited ira | Ed Slott and Company, LLC

inherited ira

Wife inherited husbands TIRA when he died. She was not yet 59.5 and set it up as inherited IRA. she is now over 59.5, will the IRS allow her to roll that inherited TIRA into an existing individual TIRA that she currently has? If so where would i look in the tax code to find this info. I currently have a custodian stating that the wife cannot roll inherited TIRA into her own TIRA.

  • Sec 408(d)(3)(C) indicates that distributions from an inherited IRA cannot be rolled over. However (C)(ii)(II) states that such account is only treated as inherited if "such individual was not the surviving spouse of such other individual". In other words, for purposes of doing a rollover an IRA inherited by a spouse is NOT treated as an inherited IRA. See IRS Pub 590 B, p 5 which clearly states that a distribution can be taken from an IRA inherited from a spouse and rolled over within 60 days to their own IRA. However, since such a distribution and rollover is subject to the one rollover limit in a 12 month period, it is preferable for the surviving spouse to notify the custodian that they are electing to assume ownership of the IRA. Then have that IRA directly transferred to the existing owned TIRA account. Note that if this this is done after the year of death, the surviving spouse is treated as if they owned the IRA the entire year. This might eliminate RMDs if the surviving spouse was not yet 70.5. Very surprising the custodian would not be aware of these rules since the spousal rollover is a very frequent transaction.
  • However, in order to provide broader guidance, the IRS issued Reg 1.408-8, QA 5 which explains how a sole beneficiary spouse can elect to assume ownership of the inherited IRA. QA 7 of this Reg is copied below:
  • Q-7. What rules apply in the case of a rollover to an IRA of an amount distributed by a qualified plan or another IRA?A-7. If the surviving spouse of an employee rolls over a distribution from a qualified plan, such surviving spouse may elect to treat the IRA as the spouse's own IRA in accordance with the provisions in A-5 of this section. 

Custodians positon was that because the wife set up a beneficiary IRA for several years until she got beyond age 59.5 that these funds must always stay in a beneficiary IRA and could not later be transferred into wifes TIRA.

Their position is incorrect, and this is not one of those questions that is a gray area. The tax code and Pub 590 A have contained these provisions for decades. The best approach is to push this issue up the ladder at this custodian since it should not be difficult for them to check with their top resource, in or outside the company to confirm this. Wife can either elect to assume ownership (if she is the sole beneficiary) or just ask for a total distribution and roll it over to her existing IRA as a rollover contribution. That would avoid arguing with the present custodian, but before taking a distribution she must be sure that she did not already use up her one 60 day rollover in the last 12 months.

 

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