A recent IRS ruling shows how a common error in IRA planning can be corrected, if caught in time.
A married couple both had IRAs, naming each other as beneficiaries. Both were older than 70-1/2 so they were taking minimum distributions. The husband died and the wife rolled his IRA into hers, giving her one IRA, with her late husband as beneficiary. This entire IRA would have to be paid out in the year after her death.
Fortunately, the wife soon realized her error. She asked the IRS to let her move her husband’s IRA into a separate account and name her daughter as beneficiary. The IRS said okay. After the husband died, the wife had until the end of the following year to begin distributions from that IRA.
The wife caught the error and requested the change before the end of the following year so she was allowed to move the IRA once again and name her daughter as beneficiary. This may provide many more years of tax deferral on the husband’s IRA.
Note: The wife can take all required distributions from her original IRA, reducing this account, which must be paid out soon over her death. The husband’s IRA, which may be stretched out over the daughter’s remaining life expectancy, can continue to grow, providing more tax deferral.
