Spousal inherited IRA taken as own | Ed Slott and Company, LLC

Spousal inherited IRA taken as own

If a spouse inherited her husband's IRA and took it as her own, rolling it into her own IRA, would there be a way to "undo" this and put the money back into Inherited status in order to avoid penalty on distributions since she's under age 59 1/2?

Unfortunately, no. Once an IRA becomes an "owned" IRA, it cannot revert to inherited status. This mistake often leads to the spouse having to initiate a rigid 72t (SEPP) plan to accomplish the penalty waiver.  The amount the spouse will need prior to 59.5 is the key to determining whether such a plan is worth the hassle. If the plan is busted at anytime, spouse will owe the penalty back to day 1 plus interest. There are also other penalty waiver situations such as distributions for high medical costs, disability, higher education, first home, etc. 

Thank you Alan.  What are the requirements for "first time home" exception?  Apparently, this client is needing distributions from this IRA to qualify for a home loan.  I was aware of the SEPP solution and know that is onerous.

  • The first home exception is limited to 10,000 lifetime to pay acquisition costs of a first home, with the homebuyer not having owned a main home in the prior two years. These costs must be paid within 120 days of receiving the IRA distribution.
  • Of course, if the person happened to qualify for a CRD up to 100k, the penalty would be waived and income could be reported over 3 years. Qualifying for a CRD has just been made easier, so that might be checked as a source of funds. A CRD must be distributed by 12/30/2020.

(Note: My first RMD) On 3-30-2020 I took the balance of my 2019 RMD of $7,404.86 from my traditional IRA CD account. Since then I have learned I can actually rollover that same amount by Aug. 31,2020 to a new IRA avoiding the tax on my 2020 return. Secondly I need to open a new SEP IRA by my extended date of Oct 15, 2020 of $9,658.00. Question is can I rollover the $7,404.86 into the new SEP IRA adding $2,253.14 to it to obtain the SEP IRA amount I need of $9,658.00. 

The above is a duplicate post. See response in your other thread.


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