Spouse IRA?
I hope someone here can answer the following question for me. My father passed away on December 5, 2008 at the age of 74 and has a traditional IRA at Bank of America. He started taking RMD’s from his IRA when he turned 70 1/2. [b]He had not taken out his RMD for 2008 prior to his death[/b]. Mother is 81 and has a seperate traditional IRA with Wachovia and recently took her 2008 RMD. What are my mothers options as it relates to my fathers IRA? I believe mother will have to instruct Bank of America to take out my fathers RMD for 2008 prior to December 31, 2008. After she takes my fathers RMD what are her best options in how to title the IRA she will inherit from my father? Would she have a RMD for 2008 if she assumes my fathers IRA prior to January 1, 2009? We have an appointment with Bank of America next week to make the changes and I wanted to get some feedback prior to the meeting. Total estate value is approximately 1.2 mm including real estate and stock/bonds. When mother passes she plans to leave the estate to her four adult children…………
TIA, Daniel
Permalink Submitted by mk foss on Fri, 2008-12-12 19:14
I’m sure Alan will give you a more detailed response but the basic answer is that she should take your father’s 2008 RMD this month then roll it over into her existing IRA or a new IRA. She should have all 4 beneficiaries listed so the IRA will go to them.
We often see problems when one spouse passes away and the survivor passes away shortly thereafter without rolling over benefits or even considering the options. Your mother is doing a good thing to handle this right now.
Sorry that you had to lose your father so close to the Holidays at such a young age.
Permalink Submitted by Michael None on Fri, 2008-12-12 19:37
[quote=”[email protected]“]I’m sure Alan will give you a more detailed response but the basic answer is that she should take your father’s 2008 RMD this month then roll it over into her existing IRA or a new IRA. She should have all 4 beneficiaries listed so the IRA will go to them.[/quote]
Mother would like to keep the IRA with Bank of America and just assume ownership of the IRA after taking fathers 2008 RMD, with the adult children listed as the beneficiaries. Do you see any problem if we make the change of ownership prior to January 1, 2009? Thanks a bunch for your quick reply……………
Permalink Submitted by Alan Spross on Fri, 2008-12-12 22:08
My condolences also.
Her best option is to immediately have the IRA titled to herself as owner, complete her beneficiary designations, and distribute the RMD of your father for 2008. The RMD itself cannot be rolled over, and will be paid to your mother and NOT to your father’s estate. There is no titling option that would erase the requirement to take his RMD.
That said, banks are not consistent in handling CDs at the time of owner’s death, if that is what was in the IRA. Some may waive early withdrawal penalties, but subject the CD to a new current and now lower interest rate. In the event the rate will be higher if your mother re titles the IRA in beneficiary format, note that even though she is 7 years older than your father, her RMD for 2009 would be larger if she based it on his age than it would be if she assumed ownership. That’s because the single life table would apply if she titled the account in beneficiary form rather than ownership, and that table produces higher RMDs than the Uniform Table used by IRA owners. Therefore, it is possible that you could end up in a trade off between the interest rate currently being paid and the RMD requirement for 2009 and beyond.
And there’s more. If she assumes ownership of the IRA, upon her death the beneficiaries will be able to use their own life expectancies for their RMDs. However, if she were to pass with the IRA in beneficiary form, her successor beneficiaries would be restricted to completing HER RMD schedule. Being in her 80s, much of the stretch (tax deferral) otherwise available to the beneficiaries would be lost. So that’s another reason for her to take ownership of the IRA ASAP.
Permalink Submitted by Michael None on Fri, 2008-12-12 22:58
[quote=”[email protected]“]That said, banks are not consistent in handling CDs at the time of owner’s death, if that is what was in the IRA. Some may waive early withdrawal penalties, but subject the CD to a new current and now lower interest rate.[/quote]
Thanks Alan. I already contacted the IRA custodian, (B of A) and the 6 month CD my father has inside the IRA matures in Feb, 2009. The bank agreed to honor the current CD rate until maturity and change the IRA ownership to mother. They will take out the 2008 RMD for father and we will file a new beneficiary form reflecting her four adult children as the beneficiaries… Funny you mentioned how inconsistent banks can be regarding CD rates. Originally they told us they were not going to honor the CD until maturity and mother would have to roll it over to a new CD at a lower APR/APY. They were pushing a 5 year CD with a 4.50 APR. If I didn’t insist they honor the current CD rate or we would roll it out to another bank they agreed to our request….. 🙂
Permalink Submitted by Alan Spross on Sat, 2008-12-13 00:11
Good. Banks owe us all some favors since it was our tax money that was used to bail them out for their investment lunacy.
Permalink Submitted by charles lore on Sat, 2008-12-13 19:54
note that even though she is 7 years older than your father, her RMD for 2009 would be larger if she based it on his age than it would be if she assumed ownership[quote][/quote]
Alan I have a few questions on this comment.
To me this suggests that if she did a beneficiary ira she would have the option of basing rmd’s on either her age OR fathers age ..Is that correct?
Also it suggest the reader may be surprised to find out her rmd is larger but to me it’s larger BECAUSE she is 7 yrs older and thus a shorter l/e and thus a bigger divisor
Forgive me if I am overthinking all this.
Also another question. If an ira owner dies in the last few days of the yr and hadnt gotten around to his rmd.. and with the confusiion and grieving surrounding the loss of a loved one at holiday time.. Is there any relief if rmd is not out by 12/31 in 2008 or year of death.. ( other than irs having a heart)
Permalink Submitted by Alan Spross on Sat, 2008-12-13 22:38
Chuck,
Most beneficiares are younger than the decedent, but if the IRA owner dies after their RBD, the beneficiary’s RMD is the based on the longer of beneficiary’s single life expectancy or the non recalculated owner’s life expectancy. In this case the decedent was 74 and beneficiary was 81. However, this was a spousal beneficiary who could assume ownership and use Table III. If the mother was over 86 and assumed ownership, her life expectancy would be shorter than continuing the RMD schedule as a beneficiary of the father.
See Pub 590, very top of p. 37 for this rule.
In this case her RMD after assuming ownership is still smaller but if she were over 86 it would be larger than continuing his schedule. But if the beneficiary continues the schedule of the decedent, the IRA must be kept in beneficiary form. That could in turn cost the successor beneficiaries their stretch if surviving spouse died with the IRA in beneficiary form.
Re beneficiary does not take owner’s last RMD in time – Yes, there is relief for this common occurrence. Beneficiary files a 5329 and ask to have the excess accumulation penalty waived due to reasonable cause. In a late year death, the IRS will almost certainly waive the penalty.