Spousal Benny options
Spouse age-48 lost husband, he had a $500k 401k at work and the 401k plan put it under a “beneficiary account” with Merrill Lynch in the wife’s name, I don’t know what this means. My question is, can the client do a partial inherited IRA (for liquidity before age 59 1/2) and partial spousal RO IRA from that account? Client’s husband died this year.
Permalink Submitted by Alan - IRA critic on Tue, 2024-10-08 10:19
It’s a beneficiary account, but spouse should also advise the plan that she is electing to be treated as the participant for RMD purposes. That may or may not have been done automatically by the plan. That will allow her to continue to delay RMDs until the year husband would have reached RMD age and also be able to use the Uniform Table for her age in that year once RMDs must begin. Any distributions taken are penalty free. If she also chooses to do a direct rollover to an inherited IRA, those same rules will apply to the inherited IRA. Once in the inherited IRA and after 59.5, she can elect to assume ownership of the inherited IRA. That would stop any beneficiary RMDs and her own RMDs will not start until age 75.
I have assumed that husband was older than her, but still passed prior to his RBD.
Permalink Submitted by Anthony Perrone on Tue, 2024-10-08 10:52
If she moves it to an inherited IRA in her name, does she have to deal with the 10-year rule or according to above she can delay any distribution until her husband would have turned 75 years of age. I have never heard of that. Is there a time limit for her to make a decision for inherited IRA or RO IRA?
Permalink Submitted by Alan - IRA critic on Tue, 2024-10-08 11:19
She is an EDB so the 10 year rule does not apply unless she opts into it, which would be a mistake. She should also be careful to set up an inherited IRA and have the IRA custodian process the request for a direct rollover to the inherited IRA. There is no deadline for doing a rollover to her own IRA, but it certainly should not be done prior to reaching 59.5, as that would subject any distributions to the 10% penalty. But there is a time limit for requesting that she be treated as the participant for RMD purposes (per Sec 327 of Secure 2.0), and that deadline is 12/31/2025. Again, while being treated as the participant for RMD purposes, the 401k (or inherited IRA after a direct rollover) is still an inherited account, and that does not change until she assumes full ownership of the inherited IRA, and assumption of IRA ownership should not occur prior to age 59.5.
Technically, an inherited plan is still treated as being in the name of the decedent, but both the decedent and beneficiary names must be shown in the account title.
Once in the inherited IRA, you mentioned a partial rollover to an owned IRA, but there is no reason to do that because the amount of distributions she may need prior to 59.5 is not predictable.