Broker Check

Spousal IRA Rollovers

October 29, 2018

Normally, you can not roll over another person's IRA into your own. If you inherit an IRA from your parents, for example, you need to put it into an inherited IRA. However, the spousal roll over is an option for married couples. The surviving spouse may roll the deceased's IRA into their own. But is this a good idea?

There are few ways to get around the 10% penalty on IRA distributions before 59.5. One of them is death. Anybody who inherits an IRA has the option of rolling it into an inherited IRA. Inherited IRAs are different from traditional IRAs. They are titled with both the inheritor's name and the decedent's name. This means you can take money out of an inherited IRA before 59.5 without a penalty.

Peggy Ann Sears did not know this. In Peggy Ann Sears v. Commissioner; T.C. Memo. 2010-146; No. 12454-08, Ms. Sears rolled her deceased husband's IRA into her own and then did a distribution. Ms. Sears was younger than 59.5, so the distribution triggered a 10% penalty. She felt that since the money came from her deceased husband, his death gets around the 10% penalty.

The tax court disagreed with her. Once she did the spousal rollover, she became the owner of the account and not a beneficiary.

Unfortunately there are many of these ‘gotchas’ in the tax code. I spend quite a bit of time learning about these. It is really important to consider your options when inheriting an IRA. Give us a call if you have any questions on this!