Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Splitting an Inherited TIRA
Posted by: BruceM, September 17, 2017 07:55PM
H&W are married. H is age 75 and W is age 50. H has a single large TIRA of $2.5MM (figures are rounded) from which he withdrew his $62,000 RMD for 2016 based on 40.4 year joint life expectancy from Table II, but suddenly died later in 2016. W has a relatively smaller TIRA and is the sole beneficiary of H's TIRA. She is considering her options.

W needs about $30,000 of income until her planned retirement in 10 years. She wants to avoid unneeded income for tax purposes. Because H died after his Required Beginning Date, these would be her options:

1. Rollover balance to her TIRA and manager as her own. This would subject any withdrawals W makes to the 10% early withdrawal penalty, although she could set up a separate TIRA in her name only, transfer a precalculated dollar amount to it and do a 72(t) SEPP that would pay her the $30K she needs using the amortization method without the 10% penalty and then roll over the SEPP IRA to her primary TIRA at age 60.

2. Continue withdrawal at decedent's rate. This would be easy but clearly would provide her with more taxable income than she needs or wants.

3. Title it as an inherited IRA and begin RMDs at the end of this year using Table I. At a life expectancy of 34.2 years assuming she'll be 50 at the end of 2017, her RMD would be about $73,000, which again is too much.

She would prefer #3 due to simplicity and not having to worry about accidentally violating the 72(t) rules which she finds confusing and a bit intimidating. And although she figures the $30,000 annual income need will be consistent, the SEPP will not allow her to change this amount if she needs to in future years without substantial penalty.

Question: Could she split the inherited IRA into two separate TIRAs, one of about $1MM and title it as an inherited IRA requiring RMDs and the remainder of the whole inherited TIRA, about $1.5MM, roll into her own TIRA and merge them....and then at 59.5 after that year's RMD has been taken, simply roll the remainder of the inherited TIRA into her own?

I think she can, but thought I might ask here.

BruceM

Re: Splitting an Inherited TIRA
Posted by: Alan S., September 17, 2017 11:15PM
Bruce, you are correct. She can roll over a portion of the inherited IRA to her own IRA leaving the amount she needs to generate the 30k in the inherited IRA.

Should she need more than 30k of income before 59.5, does not want to work until 59.5 or if the inherited IRA sustains losses and reduces the RMD, she can always distribute more than the beneficiary RMD in any year with no penalty on any of it.

Of course, if the inherited IRA has considerable gains, her RMD will increase above the 30k. While this is probably not a concern, if for any reason it becomes clear that she will need considerably less than the RMD, she could do subsequent rollovers from the inherited IRA to her own IRA or perhaps only keep about 600k in the inherited IRA to begin with. RMD would only be around 18k, but she could still take out the 30k per year for 10 years and still have a 100% pad for contingencies. Point being, she always can roll more over to her own IRA, but cannot ever move funds from her own IRA to inherited status.

NOTE: For several years, the consensus thinking was that the spousal rollover had to be 100%, but several years ago the IRS clarified that a partial rollover to the surviving spouse's own IRA was possible, and Pub 590B currently includes language supporting that. However, it is possible that some IRA custodians may not have adjusted their thinking.



Re: Splitting an Inherited TIRA
Posted by: BruceM, September 18, 2017 02:00PM
Thanks Alan.

F/U question....

In using Table I, if I'm reading 590 correctly, as the spouse sole beneficiary, each year she does not subtract 1 from the previous year's life expectancy, but instead 're-enters' the table each year...correct?

BruceM

Re: Splitting an Inherited TIRA
Posted by: Alan S., September 18, 2017 05:30PM
Yes, correct. That is referred to "recalculation" whereas a non spouse beneficiary must reduce by 1.0 which is "non recalculation".

Re: Splitting an Inherited TIRA
Posted by: Drewremedy, September 27, 2017 11:23PM
And of course it makes sense to invest in reasonably agressive investment choices under each umbrella


The desire to avoid taxes should not be the tail that wags the dog.



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