options for spousal inheritance of IRA and Roth IRA

Home Fairmark Forum Retirement Savings and Benefits options for spousal inheritance of IRA and Roth IRA

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  • #71232
    Themistocles
    Participant

    I am 72. My wife is a some years away from 59.5. I am trying to make a plan that will provide her with enough income to maintain her standard of living until she reaches 59.5 and later her SS Full Retirement Age in the event that I die before she reaches 59.5. In that case she will inherit both my IRA and my Roth IRA. From what I can gather it looks that some combination of the following available options would meet her needs depending on just how old she is when I die.

    1. Divide my IRA into one part that she will receive as a separate Inherited IRA enabling her to take the same taxable distributions without penalty that I would have been able to take were I still alive with the requirement that the Inherited IRA be exhausted in ten years. So, if she is 49.5 years old when I die she would take enough of my IRA into the Inherited IRA to fund her living for ten years. She has only a Roth IRA of her own and will be the sole beneficiary of both my IRAs.

    2. Receive the remaining portion of my IRA as owner at which she would have the same options and requirements as if it had always been hers since inception. Therefore, she would have penalties for distributions prior to her age of 59.5. But that also means that at any time she could divide what is now her own IRA and put a portion of it into a separate IRA from which she could then take Substantially Equal Periodic Payments without penalty until age 59.5 after which there would be no penalty and no more SEPPs.

    3. She could take out contributions to her own Roth at any time without tax or penalty.

    4. She could become the owner of my Roth IRA at which point she could take out my contributions without tax or penalty before reaching 59.5 after which there would be no penalties and no RMD.

    Having no SS PIA of her own, I plan that she would wait until her own FRA before beginning spousal benefits if I am alive or survivor benefits if I am not to avoid be locked into a reduced survivor benefit permanently.

    Do I have this right? If so, then the next problem would be figuring out how to optimize the variables to give her the best possible standard of living with stability.

    #71261
    Alan S.
    Participant

    1) Makes sense. The main reason to complete the spousal rollover on any portion of the TIRA would that the beneficiary RMDs are more than she needs. If she needs the full RMD (lower the younger she inherits) for living costs, she could just keep it as inherited and do the spousal rollover at 59.5. It will be difficult to forecast how much she needs including inflation for longer periods of time, but will be easier the closer she is to 59.5.

    2) This is logical and could work, but I don’t know about her ability to deal with a SEPP. Many tax advisors do not understand SEPPs very well, so who would help her not to bust the plan?

    Not to add more complexity, but after your death she could partition the inherited IRA into two portions but not immediately elect ownership of the one slated for the spousal rollover. The RMD rules allow her to assume ownership of an IRA account late in the year and to be treated as the owner the entire year. That would erase the RMD for that inherited IRA account. She would have to know that if she actually took a distribution from the inherited IRA that would have been a beneficiary RMD, she cannot roll over that amount. So the tricky part is knowing when to take a distribution and when to do non reportable transfers. For the entire plan, of course, the key is her ability to handle a large amount of complexity, options and accounts……..or who would help her.

    3) Yes, and also any conversions done over 5 years back.

    4) Same as above if she assumes ownership of your Roth. Her holding period starts with the first Roth contribution that either of you made. So the 5 years should not be an issue, but of course it would not be qualified until she reaches 59.5.

    On the other hand, if she maintains your Roth as inherited it will be qualified (5 years and beneficiary owned), so the entire account would be tax free. But again, the issue with this is that there would be beneficiary RMDs that could deplete the inherited Roth without a need for them. Like with a TIRA, she could assume ownership of the inherited Roth late in the year and that would erase that year’s beneficiary RMD as she would be treated as the owner for the entire year. Note that for all inherited IRA types, a sole surviving spouse beneficiary can “recalculate” the RMDs, which is entering the table each year instead of reducing the divisor by 1.0 each year.

    5) Of course, the strategy that you would leave her in writing may be affected by the balances of these various accounts with respect to her estimated living expense. The longer you live, the complexity of your plan will reduce. And since she is decades younger than you, that increases the chance of re marriage at some point, and that would radically change the plan.

    6) New slightly reduced RMD tables take effect in 2022. These produce around a 6% reduction in RMDs except for the very old.

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