inherited spousal ira | Ed Slott and Company, LLC

inherited spousal ira

Under the 5 year rule for an inherited spousal IRA are distributions penalty free and can they be rolled over since they are not a required RMD. RMD age had not been reached by husband.

This is a real life situation. Need advice ASAP.

Why is the 5 year rule in play?  Is the surviving spouse the sole designated beneficiary of the IRA, or are there other beneficiaries?  Almost all IRA contracts use life expectancy as the default RMD rule, and all inherited IRA distributions are penalty free. What is the age of the surviving spouse?

She is the only beneficiary and is 50 years old. The deceased spouse was 52. Want to use the 5 year rule for tax purposes. Can the distributions be rolled over into a Roth.  

  • Distributions done prior to the 5th year are not RMDs and therefore can be rolled over per IRS Reg 1.402(c)(2), QA 7. Distributions done in the 5th year are RMDs and the total remaining balance in that year as well is not rollover eligible.
  • The 5 year rule should not have been elected. Under LE RMDs, since the surviving spouse is the sole beneficiary, there are NO RMDs required until the deceased spouse would have reached 72. That's 20 years without any beneficiary RMDs, yet surviving spouse could take needed distributions without penalty until she reaches 59.5, and could then elect to assume ownership of the inherited IRA. Meanwhile she could convert whatever amounts she wanted to.  
  • Under 5 year rule, if she slips up and enters the 5th year with any balance remaining in the inherited IRA,  no further rollovers are allowed and balance will have to be distributed to avoid the 50% excise tax. However, there would still be an escape hatch, since instead of taking a distribution in the 5th year, she could elect to assume ownership and will be treated as the owner that entire year, avoiding a total distribution.  However, if she is still not 59.5 she will have preserved the IRA balance, but any distributions she takes will be subject to penalty until she is 59.5.
  • More info is needed to determine if she is now locked into the 5 year rule or not.  Again, not aware of any tax advantages in electing the 5 year rule here, but there are potential serious consequences that must be avoided. 
  • If spouse passed this year, since it is the last year to file jointly without remarrying, perhaps an incremental conversion should be considered since her tax rates filing single will rise in 2021.
 

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