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SIMPLE IRA death settlement


Guest Sten Lindquist
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Guest Sten Lindquist

If the owner of a SIMPLE IRA account dies before the two year requirement is met, can his spouse beneficiary roll the proceed to her own IRA or would the money have to go to a SIMPLE IRA account in her name?

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Guest danmar

Neither IRS notice 98-4 Q. I-3 & I-4 nor 408(d)(3)(G) specifically address a spouse beneficiary's rollover options within the 2-year period. Both contemplate rollovers and transfers only while the owner is alive.

So, conservatively, I would say that the SIMPLE account could either be settled to a beneficial SRA or rolled to a SRA in the spouses own name, but not into the spouse's own Trad. IRA account. Once the 2 years expire, the spouse could complete the rollover to her own Trad. IRA.

Of course, this interpretation defies logic, as a death distribution is not subject to the 25% 72(t) penalty. Also, no other QP offering a lump sum option restricts the spouse's ability to roll to her own Trad. IRA. Any alternate interpretations?

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  • 3 weeks later...

After 2 years (or upon death or age 59.5) the rollover to an IRA is safe (IRC 408(d)(1), 408(d)(3)(G); Notice 98-4). However, before 2 years (even upon death or after 59.5) it is likely that the payor will treat the distributiuon (to be rolled over) (or even a direct transfer) as a "taxable distribution" (see 1099-R instructions). Will the new trustee accepot it as a rollover? If IRC 72(t)(6) does not apply, then the amount must be timely tansferred into a "individual retirment plan." [see IRC 408(d)(3)(G)(ii)]

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  • 5 years later...

I found this thread while doing a search on a related question - here's the twist I was looking for:

SIMPLE IRA participant dies. Surviving spouse beneficiary has her own SIMPLE IRA. Can she roll the death distribution directly to her own SIMPLE IRA?

I cannot see any reason why this would be prohibited. Any differing viewpoints?

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"Generally," :ph34r: the same distribution (withdrawal) rules that apply to traditional IRAs apply to simple IRAs (according to the IRS in Pub 590). Death distributions are reported with Code 4 (death) rather than Code S (early distribution), regardless of the two year period. Ever wonder what "generally" means since a simple IRA is an IRA but it is not a "traditional" IRA?

It is not absolutely clear that a surviving spouse can roll over a simple distribution into another simple IRA since a simple IRA is not listed as an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of Code Section 402©(8)(B). [see IRC 408(d)(3)(A)(ii); but see IRC 408(d)(3)(G)] The answer may hinge on whether the spouse (initial spouse) is treated as owner or simply takes a distibution. It should also be noted that no contributions may be made to a simple IRA except "under a qualified salary reduction agreement." That being said, we will have to wait until the IRS see's fit to make up some rules that Congress wasn't too clear on.

Hope this helps (some). See also respnse of "danmar" above.

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Thank you Gary. I went through the same exercise and uncertainty regarding the definition of eligible retirement plan, etc... Ultimately, I was basing my thinking on the fact that rollovers from a SIMPLE to a SIMPLE are clearly permitted. Under the definitions on the 5304 SIMPLE form, Article V, #4, "...and rollovers or transfers from another SIMPLE IRA."

I probably should have been more specific in that I can't see any common sense reason why a surviving spouse couldn't roll to her own SIMPLE. Whether common sense means anything here (or at least my version of common sense) is another issue.

Do you have any gut feeling on the risk factor here? Now, other than the spouse not wanting two accounts and/or account fees, there's no advantage I can see to rolling it to a SIMPLE as opposed to a regular IRA, so I'd be inclined to take the conservative route and roll to an IRA, as opposed to the SIMPLE. But if a spouse beneficiary is bound and determined to roll to her own SIMPLE, do you think this a a big risk? And, I always refer them to their own tax counsel anyway.

Thanks again.

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While I agree with the logic of your conclusion, the rules remain unclear. I think your client would be taking a chance. What does the trustee/custodian have to say about this? If the rollover turns out to be a taxable event, the distribution from the simple IRA of the deceased spouse, may also be a taxable event. Your client would not want to pay taxes twice; and that is the likely result (absent additional guidance). I truly believe the law is inadequate and the IRS is in a difficult situation trying to make up rules.

If the two year rule is satisfied with respect to the spouse's simple IRA, the spouse could consolidate her simple IRA and her inherited simple IRA into a traditional IRA.

If I were to make up rules, they would be the same as the IRA rules (and the 2-year rule would only apply to the original owner).

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Under IRC 72(t)(6) the 25% penalty for withdrawals from a Simple IRA within the first 2yrs only applies to IRA distributions that would be subject to the 10% penalty tax under 72(t)(1). Since 72(t)(2) exempts IRA distributions paid on account of death from the penalty tax of 72(t)(1), withdrawals by the surviving spouse from a decedent's Simple IRA to the spouses's own IRA are not subject to the 25% penalty tax. Why put the funds into the Spouse's own SIMPLE when the funds could be withdrawn without penalty from the Decedent's SIMPLE IRA at any time as a distribution on account of death?

mjb

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Maybe age 59 ½ is not even an issue- --let’s assume that it’s not.

Since the spouse beneficiary can treat the SIMPLE IRA inherited from her deceased spouse as ‘her own’, the questions then becomes, is an individual allowed to consolidate two SIMPLE IRAs? As discussed earlier in this thread, SIMPLE to SIMPLE rollovers and transfers are permissible at any time. The rules that restrict the rollover or transfer of assets from another retirement plan to a SIMPLE IRA, and permit the rollover/transfer of SIMPLE IRA assets to another SIMPLE IRA, does not place any restriction on the source of the SIMPLE IRA assets that can be rolled/transferred to another SIMPLE IRA. For instance, it does not say that a SIMPLE IRA that has not met the two-year rule cannot be rolled/transferred to a SIMPLE IRA that has met the two-year rule. In my opinion, it seems permissible then for the spouse to transfer her decedent husband’s SIMPLE IRA( which now becomes her ‘own’ SIMPLE IRA) into her existing SIMPLE IRA.

Regarding the question of rolling/transferring the inherited SIMPLE IRA assets to a Traditional IRA, that would seem the safer option- as there is no doubt that is permissible- providing the decedent’s SIMPLE IRA satisfies the two-year rule.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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