Rollover contribution to inherited IRA

[Guest AFRICA6796]

As far as I understand, a rollover contribution may not be made to an inherited IRA.

I have a client who inherited her husband’s 401(k). She wants to roll it to an inherited IRA so that distributions are penalty free. Is this permissible? I told her the assets may be rolled to a regular IRA.

Please provide cites.

Thanks

Africa

[BPickerCPA]

Based upon a technical reading of the regs, and a previous PLR, I believe it can be done. However, you will probably need your own PLR to convince the custodian to permit it.

[Guest AFRICA6796]

Thanks Barry

[jpod]

Mr. Picker:

I am interpreting the poster's inquiry as involving a request to move her late husband's 401(k) account to an IRA in her own name via a rollover, which she is permitted to do. If the money stayed in the 401(k), any withdrawals by the spouse from the 401(k) would have been eligible for the exception for "after death" distributions. Are you saying that there is a PLR that holds that the exception may be available for distributions from the rollover IRA?

Do you have a cite handy?

[BPickerCPA]

What I am saying is that if there is a 401k in the deceased husband's name, with the wife as sole beneficiary, the wife can roll the funds into a beneficiary IRA with she as the husband's beneficiary. This would allow her to take penalty free IRA withdrawals. She could conceivably then roll it into her own IRA at a later date.

I am basing this on wording in the final regs, and a couple of different PLRs. The PLRs are somewhere in my PowerPoint presentation that I give at seminars, but I don't remember the numbers by heart.

[jpod]

I'm sorry, I don't understand. Are you saying that the regulations (what regulations?) allow a post-death rollover of a deceased participant's qualified plan benefits into an IRA for the benefit of the deceased participant, with the result that the IRA beneficiary can receive distributions "as a beneficiary"?

[Appleby]

PLR 9608042 (attached) permitted the spouse beneficiary to roll inherited assets from her husband’s money purchase plan account to his IRA. She was the designated beneficiary of his IRA and was therefore permitted to move the assets to an inherited IRA .. Distributions from the inherited IRA were of course penalty free.

The IRS seems to have erred on this ruling.

I don’t see how a custodian would accept a rollover contribution to a deceased person’s IRA. Who will authorize the contribution? There are some things that executors and spouses are not permitted to do with IRAs unless specifically permitted in the regs. (e.g. a executor may recharacterize a Roth contribution after the IRA owner's death).

Also.. if she is the beneficiary of the money purchase plan, shouldn’t the assets be made payable to her and not the deceased person? The more reason why the contribution would not be deposited to his IRA , since it would be a third party transaction .

Africa6796, rollover contributions may not be made to inherited IRAs:

Treas Reg describes distributions that may be rolled to an eligible retirement plan. An eligible retirement plan is defined under 4029c)(8)(B). The definition does NOT include an inherited IRA.

The Code also talks about denial of rollover treatment for inherited IRAs.

[Appleby]

Forgot the attachment

Remember also that a PLR may not be cited as precedence or law

[jpod]

Thanks, Appleby.

I've read the ruling. It's nutty, so I agree with Mr. Picker that this should not be done by another taxpayer unless he or she secures his or her own ruling.

Mr. Picker:

To close the loop, can you tell us what regulations also allow (or seem to allow) this technique? If there are regs. which allow it, why would one need to apply for a ruling?

[mbozek]

A: I dont understand your question about authorizing the contribution. In almost all IRA custodial agreements all rights of ownership of the IRA pass to the beneficiary at the death of the owner, including the right of withdrawal and yes accepting additional rollovers, making contributions and designating contingent beneficaries. The account title is changed to read "ABC as custodian of the IRA for John Doe, Decedent, Jane Doe beneficiary". Therefore the beneficiary can authorize the custodian to accept the rollover if such authorizaton is required. The IRS does not have jurisdiction to rule on the private contractual rights of the parties under the IRA. The plan can make a direct rollover of the benfits payable to the spouse to the IRA under IRC 401(a)(31). Also an inherited IRA is still an IRA under IRC 408 which is eligible for all tax deferred features of an IRA.

I think that you need to read IRA custodial agreements to determine the rights that are granted to the beneficary of the IRA upon the death of the owner. The only consequence of the inherited IRA is that the spouse beneficiary must commence the benefits at the owner's requried distribution date unless the IRA is transferred to to an IRA in the spouse's name (but such a transfer is not permitted if funds are withdrawn prior to 59 1/2 by the spouse).

[Appleby]

Originally posted by mbozek

A: I dont understand your question about authorizing the contribution. In almost all IRA custodial agreements all rights of ownership of the IRA pass to the beneficiary at the death of the owner, including the right of withdrawal and yes accepting additional rollovers, making contributions and designating contingent beneficaries. The account title is changed to read  "ABC as custodian of the IRA for John Doe, Decedent,  Jane Doe beneficiary". Therefore the beneficiary can authorize the custodian to accept the rollover if such authorizaton is required.   The IRS does not have jurisdiction to rule on the private contractual rights of the parties under the IRA.  The plan can make a direct rollover of the benfits payable to the spouse to the IRA under IRC 401(a)(31). Also an inherited IRA is still an IRA under IRC 408 which is eligible for all tax deferred features of an IRA.  

I think that you need to read IRA custodial agreements to determine the rights that are granted to the beneficary of the IRA upon the death of the owner. The only consequence of the inherited IRA is that the spouse beneficiary must commence the benefits at the owner's requried distribution date unless the IRA is transferred to to an IRA in the spouse's name (but such a transfer is not permitted if funds are withdrawn prior to 59 1/2 by the spouse).

mbozek

You are right about the passage of the rights of ownership- however, you are missing the point. By making a rollover contribution to the IRA, the spouse has elected the treat-as-own option. This means that the IRA is no longer an ‘inherited IRA’ and distributions will not be reported as ‘distributions due to death’.

I also agree that inherited IRAs enjoy the same tax deferred as any other IRA- my comments never suggested otherwise. The issue here is not whether or not an inherited IRA is a tax deferred vehicle- it is whether or not the IRS permits such an IRA to receive rollover contributions.

The individual’s goal is to rollover the inherited QRP assets to an IRA. This a spouse beneficiary may do.

The individual then wants to take penalty free distributions (due to death) of these rolled over assets- this is not permissible. If she wants to take penalty free distributions, then these must be taken from the qualified plan as ‘distributions due to death’ ( which are not rolled to an IRA)

[BPickerCPA]

Appleby,

I don't agree with your last paragraph. I believe that a spouse can roll the decedent-spouse's QRP assets into an IRA in the decedent-spouse's name, and take penalty free beneficiary distribtutions. But I would not suggest doing this without a PLR.

[mbozek]

A: Do you have a cite to your statement that the rollover by the spouse of the decedent's Q plan benefits to the inherited IRA prevents the spouse from treating the rollover as contributed to the inherited IRA? The IRS ruling cited above relied on language in prop reg. 1.408-6 that said the spouse may elect to treat the inherited IRA as her own and did not include a transfer of assets of the deceased emplyee as an election to treat the IRA as the spouse's IRA. I dont see any tax evasion in allowing the transfer of Q plan benefits to the IRA since the spouse could elect to take distributions from both the Q plan and IRA without the 10% penalty tax. Combining the assets in the IRA does not change the tax result.

[Appleby]

Barry,

Like you said earlier, an individual would probably need their own PLR to convince a custodian to do such a transaction. If this was permitted by the regs, then a PLR would not be required to effect/authorize the transaction. If the individuals in question receives his/her own PLR, then it would be very unwise for any custodian to refuse to process the transaction.

As an aside, there are instances where the IRS has

a. made opposing rulings in different PLRs

b. issued PLRs that revoked prior PLRs

One of the reason why custodian are hesitant to use a PLRas the basis for allowing a transaction not permitted by the regs.

mbozek ,

The normal tax result is never affected. It is the 10 percent penalty that is.

If the account in question is an IRA, the spouse can do whatever he/she wishes, i.e. treat-as-own, or treat as an inherited IRA and take penalty free distributions.

If the account in question is a qualified plan, it can be rolled to an IRA in the spouse beneficiary’s name. However, this IRA cannot be an inherited IRA, because rollover contributions may not be made to inherited IRAs as Inherited IRAs do not qualify for rollover treatment 408(d)(3)©.

In PLR 8623054, the IRS ruled that the distribution rules applicable on death will not apply to the spouse’s interest in the deceased spouse's IRA if the spouse elect to treat the deceased spouse's IRA as his/her own IRA. The question then becomes, how does a spouse beneficiary elect to treat his/her deceased spouses IRA as his/her own? As you know, one way of doing so is by making contributions (including rollover contributions) to the IRA.

It seems pretty clear than the spouse in question cannot do what he/she wants to do, i.e. roll the QRP assets to an “inherited IRA’ and take penalty free distribution- unless he/she obtains a personal PLR from the IRS to do so.

[mbozek]

A: All of the custodians I have worked with accept PLRs as authority for tax free transfers because they are the only authority for many types of transactions involving IRAs. I have never had a custodian reject a request for a tax free transfer becuse the plr which supports the transfer requested by a taxapayer may be reversed by the IRS at a later date. As a practical matter is is unlikely that the IRS will issue an adverse ruling to a taxpayer after issuing a fovorable ruling to another taxpayer on the same facts because: 1. the second taxpayer can withdraw the ruling request before the irs issues an adverse ruling and 2. the taxpayer would be able to point to the prior ruling as the basis for the IRS acting favorably since the IRS cannot act in an arbitrary or capricious manner and treat similarly situated taxpayers differently. The IRS could only revoke the first ruling.

If the custodian thinks there is some risk to the tax free nature of the transaction then the custodian will require that the taxpayer sign a hold harmless agreement and agree to indemnify the custodian for any tax penalities. Since plr are expensive and can take several years it is not practical to require that a taxpayer get a plr where the IRS has ruled favorably on behalf of another taxpayer. Bottom line is that the custoidan will lose the rollover to another IRA funding entity. Finally there is no procedure for the IRS to review tax free rollovers other than an audit of the taxpayers 1040 and if the transaction is audited the taxpayer can always cite the PLR as authority to the examing agent who would then have to convince the IRS to issue a contradictory ruling.

Last point: I dont think the 86 ruling you cite contradicts the 96 ruling permitting the tax free transfer to the inherited IRA. It appears they are talking about different issues and the 96 ruling is on point in allowing a tax free transfer of the Q plan interest to an IRA as the interest of the deceased participant.

[Guest Shelton]

This question is long the lines of a spouse beneficiary issue.

A trust is the designated beneficiary of an IRA.

The spouse is the beneficiary of the trust.

The trust is qualified and the spouse has full jurisdiction over the disposition of the assets.

I know there have been PLR’s in prior years that permitted the spouse in such a situation to roll the inherited assets to his or her IRA in such a situation.

However, I am being told that treas reg 1.408-8 Q&A 5 under the new proposed and final MRD regulations prohibit the spouse to move these assets to his/her IRA.

How do you view the language in 1.408-8 Q&A 5?

The language is as follows:

Q–5. May an individual’s surviving spouse elect to treat such spouse’s entire interest as a beneficiary in an individual’s IRA upon the death of the individual (or the remaining part of such interest if distribution to the

spouse has commenced) as the spouse’s own account?

A–5. (a) The surviving spouse of an individual may elect, in the manner described in paragraph (B) of this A–5,

to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if

distribution thereof has commenced to the spouse) as the spouse’s own IRA. This election is permitted to be made at

any time after the individual’s date of death. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA.

If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.