Inherited Spousal IRA

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  • #7273
    Bruce1950
    Participant

    With the SECURES Act, I’m getting conflicted information on spousal options when inheriting the deceased spouse IRA. Generally, when the spouse is sole beneficiary, and let’s say for simplicity its a she, then she will be an Eligible Designated Beneficiary (EDB) and will have the same 4 inheritance options she had prior to SECURES, namely….

    1. Roll into her own and treat as her own. The name of the deceased spouse comes off the IRA and it becomes owned solely by the surviving spouse.

    2. Title the IRA as an inherited IRA, titling the IRA to the decedent and the spouse, with RMDs beginning not later than 12/31 of the year following the year of death, using Table I and re-entering the table each subsequent year for the life expectancy divisor

    3. If the decedent dies prior to Required Beginning Date, title as an inherited IRA but defer first RMD until the decedent’s Required Beginning Date year

    4. If the decedent dies prior to RBD for TIRA and any age for RIRA, use the 5 year rule, where the account must be fully withdrawn not later than the end of the 5th year beginning the year following the year of death.

    Assuming this is correct, the conflict I’m reading is #4. Some IRA custodians I’m reading are using 5 years while others are using 10 years.

    Sec. 401(a)(1)(H)(i) says

    “(i) IN GENERAL.—Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)—

    “(I) shall be applied by substituting ‘10 years’ for ‘5 years’,

    Which tells me the surviving spouse beneficiary has 10 years, not the old 5 years, to fully withdraw the account balance. Correct?

    If so, will this 10 year period also include TIRAs where the decedent was >70.5 and had already begun RMDs?

    Thanks

    BruceM

    #7274
    Alan S.
    Participant

    Hi Bruce. It is interesting to first examine the old RMD rules with respect to the election of the 5 year rule for a sole spousal beneficiary. First, although the 5 year rule was rarely elected due to disadvantages in most cases, the spouse COULD make that election and no annual RMDs would be required until the 5th year. There was an added risk here, since if the spouse took a distribution in the 5th year, it would have been an RMD and could not be rolled over, and that distribution could well have been the entire account balance. That said, if the surviving spouse elected to assume ownership in that 5th year, they would have successfully accomplished the spousal rollover.

    Moving from there to Secure, the 10 year rule has replaced the 5 year rule for non EDBs regardless of when owner passes, and LE RMDs disappear. But it’s not clear if a surviving spouse EDB can still elect that 10 year rule, avoid annual RMDs, and then elect to assume ownership anytime prior to the end of year 10. Or is LE the only option for EDBs?

    I see the “conflict” you cited as not being 5 years v 10 years, but rather LE v 10 years. 5 years is definitely out except for non DBs, but the way I read it a surviving spouse and other EDBs still have the option to elect the 10 year rule AND regardless of when the owner passed. There are risks of making this election, and disagreement over this option as well. The IRS will have to clarify this, but historically surviving spouse beneficiaries have always enjoyed the broadest of options.

    #7275
    Bruce1950
    Participant

    Hi Alan
    That is intriguing.
    Sole surviving spouse IRA beneficiary keeps the IRA as inherited and does not take RMDs and either the deceased spouse was past their RBD or the inheriting spouse does not begin RMDs for the year the deceased spouse would have attained their RBD…this would seem to be proof positive the 10 year rule has been elected. But then at year 9, the spouse rolls over the IRA into their own? Is this possible?

    If so, it would seem an easy fix by having the surviving spouse designate the inherited IRA as a 10 year IRA by putting the ‘termination’ date in the titling of the inherited IRA.

    Thanks

    BruceM

    #7278
    Alan S.
    Participant

    And the old default rule for sole spousal beneficiaries continues to apply under which an inherited IRA from which the RMD is not distributed is deemed to have been assumed by the survivor. Therefore, the unknown is now whether that will happen after one year for failure to take the annual RMD as an EDB or at the end of 10 years for failure to drain the account under the 10 year rule. The spouse needs to know whether they have defaulted to ownership or not, so we are back to square 1 with the question of whether the spouse can elect the 10 year rule to avoid annual RMDs.

    With respect to rolling over at the end of year 9, that should be OK, but they should never wait until the 10th year if they are going to take a distribution since that distribution could be deemed to be an RMD under the 10 year rule and not rollover eligible. The spouse should always do the spousal rollover by direct trustee transfer, that way there is NO distribution that the IRS could deem to be an RMD.

    This is analogous to the old rule for a qualified plan with the 5 year rule as the default for deaths prior to RBD. For a QRP where direct rollovers are treated as distributions, a surviving spouse had to do any rollover before the 5th year. If they waited until the 5th year the entire balance became an RMD because it had to be reported as a distribution on the 1099R, and the stretch was lost.

    Of course, we are discussing the outlier of a spouse preferring the 10 year rule to avoid annual RMDs and that should be very rare. It almost never happened with the old 5 year rule, but perhaps 10 years will be more tempting.

    Am still speculating here, not knowing how the eventual IRS guidance will read. Natalie Choate for one apparently feels that the 10 year rule is OFF the table with respect to EDBs, but there are still several aspects of Secure that even she is not sure what the IRS will do. The Secure guidance has been pushed back by Covid, so there may continue to be several situations remaining in limbo as time passes.

    #7283
    Lewis-H
    Participant

    If a traditional IRA is inherited from a spouse, the surviving spouse generally has the following three choices: Treat it as his or her own IRA by designating himself or herself as the account owner. Treat himself or herself as the beneficiary rather than treating the IRA as his or her own.

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