5 year rule and spouse rollover
TIRA account owner dies in 2011 at age 75 after taking 2011 RMD
Surviving spouse also age 75 is sole beneficiary and intends to wait until late 2016 (pursuant to the 5 year rule) to make a rollover of the entire balance to her own IRA
Her intent is to avoid RMDs for 2012-2016
Does this work?
Thanks
JP
Permalink Submitted by Alan Spross on Mon, 2012-11-26 20:34
No, it’s not possible because the 5 year rule can only apply when the decedent passes PRIOR to the required beginning date.
Surviving spouse can take RMDs starting in 2012 as beneficiary, but that RMD would be higher than the RMD produced by rolling it over to an owned IRA account. Further, if the surviving spouse does nothing in 2012, a default rule results in deemed ownership of the IRA for failing the take the RMD required as a beneficiary. There is still a potential penalty, but it would be based on the lower RMD of an owner vrs that of a beneficiary.
Permalink Submitted by Anonymous (not verified) on Mon, 2012-11-26 21:37
Thanks Alan.
To close the loop on the concept let’s change the facts to death occurring at age 70 before RBD.
Would the 5 year rule allow the surviving spouse to avoid RMDs during the period the decedent would have been over 70 1/2?
Thanks
Permalink Submitted by Alan Spross on Tue, 2012-11-27 02:37
Strangely enough, I have never seen this question asked. The answer is Yes.
Since life expectancy is now the default RMD provision, the surviving spouse would have to elect the 5 year rule. There is also another rule that indicates that a sole spousal beneficiary does not have to begin RMDs until the year the deceased spouse would have reached 70.5. However, this rule is not applicable if the 5 year rule is elected. But there is nothing to stop the surviving spouse from electing the 5 year rule.
So let’s say the deceased spouse passes at age 70 prior to the RBD and the surviving spouse is the same age but wants to defer RMDs as long as possible. Rolling it over would result in RMDs in the following year and each year thereafter. By electing the 5 year rule, there is no annual RMDs, but the account must be drained by the end of the 5th year following the year of the spouse’s death.
There is another provision that allows a surviving spouse to roll over an inherited IRA at any time after the spouse’s death. If done in any year following the spouse’s death, the surviving spouse is treated as if they owned the IRA the entire year. Further, an additional provision provides that if the surviving spouse fails to take the RMD required as beneficiary, they are deemed to become the owner of the IRA if they are the sole beneficiary. Therefore, in this example the spouse could avoid RMDs until the 5th year and even when they fail to take the lump sum by the end of the 5th year, they are deemed to become the owner for that year and would have to take the RMD as owner. For this IRA, RMDs have been avoided for 4 years when they would not have been had the surviving spouse rolled over the IRA in the year following death.
Note that if the spouse is not the sole beneficiary, they cannot become the owner by default and would have to act sooner to avoid a possible excess accumulation penalty.
I have never seen this strategy recommended, which made me suspicious that the 5 year rule RMD could not be rolled over, but I can find nothing that indicates that the surviving spouse cannot roll over inherited IRA death benefits due to having elected the 5 year rule.