If a spouse inherited traditional IRA is rolled over to an owner IRA in 2021, which rules apply for the 2021 RMD?
I know that the 2021 RMD value is determined by the IRA account value as of Dec 31, 2020. The account is currently an inherited IRA (surviving spouse was sole beneficiary). If the account is rolled over in 2021 into an owner IRA before the 2021 RMD is taken, can the 2021 RMD be calculated using the more favorable owner rules (Uniform Life table) instead of the inherited IRA rules (Single Life table) or does the status of the IRA as of Dec 31 2020 need to be respected?
More background if needed:
Helping out my mother-in-law whose husband passed away in Jan 2019 at age 76 (he would have turned 77 in 2019).
She is a year older and both had been taking RMDs correctly from their respective traditional IRAs.
After he passed, my mother-in-law was sole beneficiary and father-in-law’s IRA was converted into an inherited IRA at the same institution. The 2019 RMD for the inherited IRA was taken correctly using my father-in-law’s life expectancy factor from the uniform life table.
Then 2020 happened and no RMDs were required and none taken.
When looking at the 2021 RMD the fund management company calculation is using the Single Life Expectancy table which triggered the realization that she needs to roll over the inherited IRA into her own IRA to benefit from the more favorable rules for RMDs. But have we missed the boat for the 2021 RMD and it will have to be taken based on the inherited IRA rules?
Permalink Submitted by Alan - IRA critic on Wed, 2021-09-08 01:28
No, you she has not missed the boat. Other than in the year of death, the year in which a sole spousal beneficiary elects to assume ownership of the inherited IRA is treated as if she owned the IRA the entire year. As such she can use the Uniform Table and it’s much lower RMDs than the single life table. So she needs to assume ownership before year end with enough time to then take the Uniform Table 2021 RMD.
That said, it matters how she does the spousal rollover. With assumption of ownership there is no distribution from the inherited IRA.The distribution occurs later from the owned IRA. Conversely, if she were to instead take a distribution from the inherited IRA, the single life table would apply and she could only roll over to her own IRA in a 60 day rollover the amount in excess of the single life table RMD. Therefore, to take advantage of the lower RMD, assumption of ownership should be done and no distribution taken until the IRA is transferred (not a distribution) to her own IRA.
If ownership is elected, the RMD is still based on the 12/31/2020 inherited IRA balance, but the Uniform Table is used. If she already has her own TIRA, the RMD for that is determined as usual. And if she already owns a TIRA, once ownership is assumed, she can combine the two by a non reportable direct transfer.
Finally, another danger of the 60 day rollover method is the one rollover limit, which applies to spousal inherited IRAs along with her own IRAs. If she does not have a rollover available because she already used it in 2021 in her own TIRA, a distribution from the inherited IRA could be a disaster.
Permalink Submitted by James Holland on Wed, 2021-09-08 04:41
Thank you very much for the detailed response – all clear now. I will asist my mother-in-law with the assumption of ownership via transfer to her own TIRA. And then after that work on the RMDs.