Hello,

I am a financial advisor in Dallas and appreciate all the training & education Ed has provided over the years to ML advisors like me. I have a question for Ed.  When meeting with a potential client, I uncovered a potential problem … And potential subsequent solution but am not sure if it’d work.

The gentleman is 80, still working full-time and loves his job. His much younger wife (age 54) just suddenly died a week or so ago. Neither had/have kids and/or grandkids. He still contributes into his large 401(k) and, since he is still working, is exempt from having to take RMDs since he doesn’t own the >5% of company.

His wife had a large IRA. As a spouse, he has the option of consolidating her IRA into his name. HOWEVER, I’m thinking that doing so would immediately subject him to taking RMDs. He doesn’t need the money.

My thought was to have him roll her IRA into his 401(k) instead. I’m thinking this would sidestep the RMD requirement for now. Just not sure if this is possible and/or what little items would sneak up to bite him.

Thank you in advance,

Brian

Hi Brian,

As a spouse beneficiary your client has a couple of options. He may want to choose to remain as the beneficiary of his deceased wife’s IRA. If he does this, he will not need to take a required minimum distribution (RMD) until the year his deceased wife would have been 70½. Because she was only 54 when she died that would allow him to delay RMDs for many years. He could do a spousal rollover at any time. There is no deadline for selecting this option.

If he does decide to go with a spousal rollover, you are right that he will have to begin taking RMDs because he is over age 70 1/2. However, if he qualifies for the still-working exception for his 401(k) it may be possible for him to then roll over that IRA into his 401(k) and delay RMDs on those funds until the year he retires. The plan must be willing to accept the IRA funds. Not all plans do. You will want to be sure that any RMD due for the year is paid out and not rolled over to the plan before the funds are moved.

Good Day,

I have a client who together with his wife earns too much money for either to contribute to a Roth IRA. His wife currently has an IRA valued at about $100,000, and she also has a 401(k) through her employment. The husband just has a 401(k) and his job. My understanding is that we can open two nondeductible IRAs and convert each of them into a Roth IRA. Do I have to be worried about the pro-rata calculation for the wife because she has an IRA balance outside of her 401(k)?

Shaun

The backdoor Roth IRA can be a great strategy to get around the income limits on Roth IRA contributions. However, there are some limitations to this strategy and it sounds like your client’s wife is running into one of them. If an individual has other IRA funds, those funds must be considered for purposes of the pro-rata formula when doing a conversion as part of the back-door Roth IRA transaction. 401(k) are not included in this formula. You client’s conversion would not be taxable but his wife would not be so lucky with hers.