Spouse as sole beneficiary of TIRA

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  • #4900
    Bruce1950
    Participant

    If younger spouse is sole beneficiary of TIRA that she inherits and she needs the withdrawals but is <59.5 so does not wish to roll it into her own IRA, one of her options is to keep the inherited IRA titled to the deceased owner but naming her on the IRA as the beneficiary. Here, she can elect to begin RMDs, the first beginning the year following the year of death, using Table I and ‘re-entering the table each year. The other option is to NOT begin RMDs but wait until the deceased spouse would have been 70.5 and then begin RMDs. A couple of detail questions on these….

    1. With the first option, she could take more than the RMD without being assessed the 10% penalty…correct?

    2. With the second option, I think she can take elective withdrawals while waiting for the first RMD year while still avoiding the 10% penalty, correct?

    3. With the second option, whose life expectancy is used to determine the RMD in the year the decedent would have attained 70.5…the survivor’s (hers) or the life expectancy of the deceased IRA owner had he lived?

    4. For both options, can the surviving spouse at any point elect to roll over the balance of the inherited IRA into her own? If so, and an RMD is due that year (for either option), must the RMD for the year of the rollover be withdrawn prior to the rollover into her own IRA?

    Thanks

    BruceM

    #4901
    Alan S.
    Participant

    Bruce,
    1) You are correct. If sole beneficiary spouse takes distributions in years before deceased spouse would have reached 70.5, these are not RMDs, just distributions. Correct that these distributions have no minimum or maximum limit.

    2) Correct. With second option starting when deceased spouse would have reached 70.5 (12/31 of that year), there is the RMD minimum but no maximum distribution. All distributions from the inherited IRA are coded 4 on the 1099R and therefore have no 10% penalty regardless of age.

    3) The beneficiary’s recalculated age (enter Table I each year) is used in this case. The decedent’s non recalculated age would only apply if they passed after the RBD and was younger than the beneficiary spouse. This would produce a lower distribution and therefore would be the RMD as long as it remained lower.

    4) Yes, the surviving spouse can do the spousal rollover (best done by electing to assume ownership) anytime they wish, but this is an irreversible decision. In any year AFTER the year of owner’s death, if a spousal rollover is done, the RMD for that entire year is calculated from the Uniform table, making the RMD for that year much lower than a beneficiary Table I RMD. A beneficiary RMD does not have to be done first and in fact the election of ownership is best done prior to taking a distribution for that year. If a beneficiary distribution (Code 4) is taken PRIOR to assuming ownership and exceeds the Uniform Table RMD, the amount in excess of the Uniform table RMD can be rolled back if done within 60 days, to reduce the distribution to the Uniform table amount. While an RMD cannot be rolled over, the act of assuming ownership effectively recalculates the RMD for that year to the lower amount. But to avoid this confusion and using up the one rollover allowed, it is preferable to not take any distribution in the year of ownership election until after the IRA is owned. That avoids the code 4 1099R.

    I think we have discussed before another way to accomplish the spousal rollover, and that is failing to take the full beneficiary RMD in an RMD year. That IRA then defaults to ownership status, effectively reducing the RMD for that year. But this should also be avoided if possible because it leaves the IRA titled differently than it’s ownership status and also causes confusion.

    In summary, there are various ways to do the “spousal rollover”, but the best is to elect ownership first to avoid a 1099R with a code 4 and also avoid using up the one 60 day rollover permitted. At the time of the election, the custodian will usually transfer the balance to an owned IRA. Then the Uniform table RMD can be taken by the end of the year if the beneficiary has reached 70.5. Most spousal beneficiaries will elect ownership after 59.5 and not wait until the deceased spouse would have been 70.5.

    It is interesting that an IRS study released this week in conjunction with the recommendation of new RMD tables starting in 2021 found that only 20% of IRA owners limited their distributions to the RMD amount after 70.5. That means that 80% take out more than their RMD, so the reduced RMDs from the new tables (down 5.5-6%) will not help 80% of older IRA owners. It will only help the 20% with higher incomes that for which only the RMD is enough.

    #4902
    Bruce1950
    Participant

    Thanks Alan
    Just to clarify….

    Let’s say surviving spouse is 50 and deceased spouse 65 and she, surviving spouse, is sole beneficiary. She can then keep the deceased spouse TIRA titled to him as deceased owner for the benefit of her (inherit it), but delay RMDs 5 years until the year he would have attained age 70.5. During this 5 year period, she can make elective withdrawals without the 10% penalty. Then in the year the decedent would have attained age 70.5, she could rollover the IRA to her own then calculate that year’s RMD based on the amount of it as of 12/31 of the prior year using her life expectancy from the Uniform Table….and then not be subject to any further RMDs until the year she attains age 70.5?

    Another kind of interesting tid-bit on the new proposed Uniform Table. I calculated the tax savings based on the new survival periods (divisor) and something interesting pops up. The spread on the age is high at 1.7 years for the first few years, but the difference gradually shrinks and is zero by agee 103. The annual tax savings peaks at about age 80 but then due to the large TIRA account balance, actually turns negative at age 88 over the older Uniform Table, assuming an average annual investment return of 5%. But of course, this assumes the RMD would otherwise not have been taken. As you say, if more than the RMD amount will be withdrawn, then as long as the owner is alive, this point is really moot.

    BruceM

    #4928
    Alan S.
    Participant

    First paragraph – Yes, except that in the year he would have reached 70.5, she would only be about 56. If she assumed ownership that year, there would be no RMDs for her because she is treated as the owner the entire year. But by owning the IRA at 56, any distributions she would take prior to 59.5 would be subject to the 10% penalty. Therefore, the choice boils down to the need for distributions for 3 plus years. If she will need them best to take the small beneficiary RMDs penalty free. If does not need them and prefers to avoid RMDs that are not needed, then she could assume ownership. This can also be done partially, ie do a spousal rollover for part she will own and leave the rest as inherited until 59.5.

    Paragraph 2 – interesting. If the early RMD years will have RMDs cut by 5-6%, those higher balances will start to erode the advantage of the new divisors. There will also be larger distributions after the first spouse has passed that will be taxable to single filers.

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