spousal inherited IRA question

Submitted by Linda Taylor on Fri, 2018-08-10 21:35

Sister is 48 and her husband was 67. He died 2 weeks ago. She has enough assets to live on for next several years, but will likely require IRA withdrawals prior to her age 59.5. If his pre-tax retirement accounts (403b and 401k and IRA accounts) are kept in an inherited IRA, it is my understanding she can take penalty-free withdrawals as necessary. However, I believe she must start taking RMDs in the year husband would have turned 70.5, which will be 2021. At that time, she will only be 51, so still 8 years from being able to withdraw penalty-free.

I’m confused about her RMD requirements starting in 2021. Will she take RMDs based on her own life expectancy from the single life table? Also, if she takes the required distributions each year until she turns 59.5, can she then rollover to her own IRA and stop taking RMDs at that time?



Submitted by Alan - IRA critic on Sat, 2018-08-11 00:24

  • Yes, her beneficiary RMDs are based on her life expectancy using Table I each year starting in 2021. She does not reduce the divisor by 1.0 each year because she is a sole spousal beneficiary. All her RMDs and any additional distributions will be penalty free. At 59.5 she can elect to assume ownership of the inherited IRA(s), cease taking RMDs until 70.5, but take any distributions needed without penalty. She should do the direct rollover of the employer plans to inherited IRAs no later than 12/31/2019 unless she is very sure that those plans do not require the 5 year rule for deaths prior to the RBD. If that was the case and the rollover was not done by that deadline she would be stuck with the 5 year rule including from the inherited IRAs that received the late rollover.
  • She should also check the workplace plans to determine if any after tax contributions were made, or if any Roth accounts existed in those plans. In addition, if she inherited any highly appreciated employer shares in the 401k, NUA is a possibility that should be researched.
  • Finally, she should have the account re titled and name her own beneficiaries ASAP.

Submitted by Linda Taylor on Sat, 2018-08-11 01:52

There are no after-tax contributions in the employer plans, but husband did have an IRA and there are after-tax contributions in his IRA.  How would those be handled?  Would she still have the same pro-rata taxation that her spouse would have had upon withdrawing funds from the IRA?  Also, she has after-tax contributions in her own IRA too.  So at age 59.5, when she assumes ownership of the inherited IRA, perhaps she should continue to keep it in a separate account from her own original IRA, rather than rolling over the inherited IRA to her IRA?  In order to keep the percentage of after-tax contributions straight for both accounts?

Submitted by Linda Taylor on Sat, 2018-08-11 02:46

One more question – there is a substantial amount of pre-tax money in three different places:  (1) employer 403b plans; (2) an old USAA retirement annuity account; and (3) a Vanguard traditional IRA account.  Total is over $2M, so she certainly won’t need access to ALL of that anytime soon.  If all of that money is placed in one inherited IRA account, then in 2021, when deceased spouse would have turned 70.5, the RMD will be quite large.  At that time, can she assume ownership of just a portion of the inherited IRA assets, by rolling over just part of the balance to her own IRA, thereby avoiding the RMD on that portion?  Or should she establish two or three inherited IRAs from the start (now), and then take ownership of one at a time after 2021, based on her situation at that time?

Submitted by William Tuttle on Sat, 2018-08-11 12:58

  • For example, Inherited and owned IRA basis is tracked on. separate Form 8606s
  • If she has access to a 401k that accepts IRA rollovers.
  • She could assume ownership of his IRA with basis. Rollover the other two accounts to an Inherited IRA.
  • Rollover all pre-tax balances on all owned traditional, SEP and SIMPLE IRA accounts to the 401k.
  • Do a Roth conversion of the remaining non-deductible basis.
  • This will isolate and stop pre-tax earnings on both her and his non-deductible basis.
  • In the year following the year of the Roth conversion. It is critical that this happens in a year after the Roth conversion. Rollover the excess balance in the Inherited IRA to her owned IRA. Only leaving a balance in the Inherited IRA to cover necessary penalty-free withdrawals until age 59 1/2, plus an adequate safety margin.
  • After age 59 1/2 rollover any remaining balance in the Inherited IRA to an owned IRA.
  • The last two are for the benefit of any heirs. Someone inheriting an Inherited IRA must base there RMDs on the original beneficiary’s age. Someone inheriting an owned IRA has the full range of options including as a spouse. I know she is not thinking about this at this time. However, she is a young women and may end up remarrying.
  • Finally, as always it is important to add beneficiaries to the inherited accounts ASAP when they are created.

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    Submitted by Linda Taylor on Sun, 2018-08-12 02:39

    That sounds like a great strategy. Thank you!  However, even if her employer plan will accept the IRA rollover (in order to then extract the basis), that still leaves too much in an inherited IRA.  Before RMDs start in 2021, I think she would want to take ownership of a portion so the balance for RMD purposes would be reduced. Can she take ownership of just part of the inherited IRA in 2020? Or should she establish separate inherited IRA accounts now?  Then just take ownership of one or two in 2020, leaving the rest as inherited IRAs?Thank you so much for your help!

    Submitted by William Tuttle on Sun, 2018-08-12 22:20

    • She can take ownership/rollover of/to an owned IRA from the IRA with basis now.
    • She can do a direct rollover of the other inherited retirement accounts to Inherited IRA(s) now. As long as none of them were already inherited accounts they could all go to one Inherited IRA. See my last snippet on the annuity.
    • She can rollover the portion of the Inherited IRA balance(s) that she does not need for withdrawals prior to 59 1/2 in the year after she does the Roth conversion of the non-deductible basis. This is important to avoid prorata taxation.
    • The annuity is an added complexity to the mix. I think Alan S. will need to comment on the whole picture. It is outside my scope of knowledge.

    Submitted by Linda Taylor on Tue, 2018-08-14 00:30

    I apologize that I didn’t fully understand your previous response.  I was just trying to foresee that in 2021, she might want to rollover just a portion of a $1M +/- inherited IRA account to her own IRA account, even if the other $1M is already in her own IRA or her employer plan.  I wasn’t sure if it’s all or nothing but you’ve clarified that.  Thank you very much for your help.  We’ll find out later in the week from USAA what her options are for the qualified retirement annuity.

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