Question: “My wife passed away in January of 2023. She was 59 and had a traditional IRA of which no distributions had ever been made. I was the sole beneficiary. Upon her passing, the financial planner opened a new account in my name and transferred her assets into it as a rollover. The account remains ‘pure’ since her passing; no distributions have been made, no contributions or commingling of funds from my other accounts.
I am nine years older than my wife, and I will turn 73 in 2027. If the financial planner had created an ‘inherited’ IRA as ‘wife FBO husband’ for the transfer of assets (instead of a traditional IRA), then I would have been able to defer RMDs on that account until her required beginning date in 2036. The account value is over $400K. What the planner did is not improper, but it does not serve my best interest and I was not presented with options. I have spoken with multiple people within the planner’s organization, and they are not willing to change my account.
The form I signed with them had no indication as to ‘how’ the transactions would be handled (inherited vs. traditional) — just that I authorize the planner to handle it. What I was hoping is that the planner could change the IRA to an inherited one, as there have been no external transactions (and no IRS reporting) on the new account since inception; that is the type I would have preferred. I have spoken with competitors, and they won’t take the new traditional rollover and set it up as inherited, as that’s no longer ‘like for like.’ I’ve written letters to the SEC, who referenced it back to the original planner’s higher ups and they refuse to change it. Is this worth pursuing with an attorney? I would prefer to kick the can down the road for RMDs. Is there anything else I can do?”
Answer: You are correct that you could have theoretically kept the account in a beneficiary IRA and deferred the RMDs. And pros say that your adviser likely should have known this. You may want a new adviser — you can use this free tool from our ad partner SmartAsset to match you with financial advisers, as well as sites like CFP Board and NAPFA. But first, let’s get into what happened here.
“Because you apparently had no need for the income, the beneficiary IRA would have been the better option,” says certified financial planner Joe Favorito at Landmark Wealth Management. “That is less common as most spouses are either close in age or there is some need for the income.”
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
As a spouse, you can choose to remain a beneficiary on your wife’s IRA or transfer the assets to your own IRA. “Remaining a beneficiary on your wife’s IRA in this case would have allowed you to delay RMDs until her required beginning date,” says certified financial planner Brett Tushingham at Farther. “As you stated, this would have allowed you to take advantage of the tax deferral for several more years. Unfortunately, the IRS generally views spousal rollover as an irrevocable decision.”
That means the account is now treated as your own, and reclassifying it to an inherited IRA is not permitted, regardless of the pure status of the account, says Tushingham. “There have been several private letter rulings by the IRS on this matter and all have considered spousal rollovers as irrevocable decisions,” he says.
In terms of recourse, you might struggle to get what you want. “Once the money has been removed from the beneficiary IRA, it cannot return, to my knowledge,” says Favorito. “I have never seen a rollover back in that situation — and I don’t believe it could be done unless you had given specific instructions for the account to be transferred to a beneficiary IRA and it was moved mistakenly. Even then, it would have likely had to be resolved much sooner than two years later.”
Given that the planner did not present the inherited IRA option and that the authorization form lacked specificity, Tushingham says you may have grounds to argue that the rollover was processed without adequate disclosure, potentially constituting a breach of fiduciary duty.
What the adviser did was not illegal or technically even unsuitable, says Favorito. “It just wasn’t the best choice. You could pursue arbitration but I’m not sure you would even win with that one as the adviser’s position would be that you never gave him instructions to preserve the assets in a beneficiary IRA, which is less common among spouses. Unfortunately, I think you’re likely stuck with the accelerated RMDs and the corresponding tax liability,” says Favorito.
“That said, proactive tax planning can still help minimize taxes over your lifetime. Although you won’t be required to take IRA distributions until you turn 73, it might make sense to start earlier and take advantage of potentially lower tax brackets now. If you’re older than 70½, you’re eligible to make qualified charitable distributions directly from your IRA, a strategy that could further reduce your taxes,” says Tushingham.
A CFP or tax professional can model these strategies and integrate them with your overall financial plan to optimize tax efficiency.
At this point, it’s probably time to get a new adviser. Given the circumstances, you’ll probably want to work with a fee-only project-based adviser who can answer any specific questions you have and make sure you have a financial plan that is properly tailored to your goals and time horizon.
Many CFPs offer hourly and project-based services for a fraction of the cost of an adviser who charges 1% AUM. Hourly planners often cost between $200 and $500 per hour and project-based advisers charge between $1,500 and $7,500 depending on the complexity of the case. To properly vet a planner, in addition to asking these important questions, you should also inquire about whether they work with people in situations similar to yours. You can use this free tool from our ad partner SmartAsset to match you with financial advisers, as well as sites like CFP Board and NAPFA.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
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