Spousal Beneficiary
My client is the spousal beneficiary of a retirement plan. My understanding was she could roll the $ to an inherited IRA and take penalty free distributions over her life expectancy or within 5 years. Reading the materials from the last session I attended, that appears to be incorrect. Can someone clarify ? Thank you
Permalink Submitted by Alan Spross on Tue, 2010-01-05 18:42
The 5 year rule only applies if the deceased spouse passed after their required beginning date.
But there are also plan provisions that can affect the options. What was the date of death and was it prior to the RBD?
Permalink Submitted by Robert Troyano on Tue, 2010-01-05 19:48
date of death was 12/28/09, plan was a NYC defined benefit plan with the spouse receiving a lump sum payment at death. Thanks
Permalink Submitted by Robert Troyano on Tue, 2010-01-05 19:49
sorry, he had already started taking distributions.
Permalink Submitted by Alan Spross on Tue, 2010-01-05 20:05
Then the 5 year rule does not apply. Also, there are no RMDs due from 2009 since they were waived. In the inherited IRA, RMDs will be based on the recalculated single life expectancy of the survivor, but there will be no penalty since this will be a death benefit. Generally, this option is only used by survivors under 59.5 if the deceased spouse was subject to RMDs. Once the survivor reaches 59.5, they should assume ownership or roll it into their own IRA.
The survivor is not limited to RMDs only and can take out any amount they wish, so in effect could take it out in 5 years. But they should not wait to take out their first RMD amount prior to the end of this year.
Sometimes there is also resistance in setting up the inherited IRA because this is not in the tax code, but was authorized in PLR 2004 50057. It might take a few calls to get a custodian to open the account, but usually a custodian can be found to do it.
Permalink Submitted by Robert Troyano on Tue, 2010-01-05 20:19
Thank you !
Permalink Submitted by Robert Troyano on Thu, 2010-01-07 17:00
Alan, Sorry to bother you but she would be able to take it out of the inherited IRA without 10% penalty even though she is under 59 1/2 ?
Thanks
Permalink Submitted by Alan Spross on Thu, 2010-01-07 17:32
Yes, as long as the IRA is registered in inherited format, still showing the decedent’s name as well as the beneficiary, there is no early withdrawal penalty. Distributions would be coded as a “4” (Death Distribution) on the 1099R.
But there is a default from inherited status to ownership status IF the spousal beneficiary fails to take RMDs required as the beneficiary. If the IRA defaulted to owned status because of this, then distribution under 59.5 would be penalized. Therefore, it is important that the RMD be taken each year as a minimum.
Permalink Submitted by Robert Troyano on Thu, 2010-01-07 20:03
Thank you very much !