IRA and Heirs

Submitted by Ron Corcoran on Sat, 2022-09-10 23:20

My IRA has three parts.. Trad, Roth, and a taxable brokerage account. I’d like to gain a better understanding of rules for heirs on two levels. My first RMD will be next year unless the rules change later this year.

My wife is a few years younger. Will she simply be able to ask Vanguard to put her name on the account and take mine off ? (if I’m deceased) OR will she need to create an inherited IRA that is subject to different rules?

I assume she would get a step-up in basis for the NUA stock. If she passes a year or two later, will her heirs get another step-up in basis on the same NUA?

I hear heirs may have to deplete IRA within 5 years.. does that apply to all three sections.. Trad, Roth, and Taxable Brokerage?

The other confusion I have is how our RMD age might change things.

Sincerely appreciate a reply, when you have time. Thanks, Ron

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Permalink Submitted by Alan - IRA critic on Sun, 2022-09-11 00:45

Assuming your wife will be over 59.5 when you pass, she should assume ownership of both your TIRA and Roth IRAs. Initially, when she submits the death Cert. and her contact information, two beneficiary IRAs will be created and the funds transferred into those inherited accounts, but she should then immediately notify the custodian that she is electing to assume ownership. She will have no RMDs for life on her Roth IRA. The TIRA will be subject to RMDs when she reaches 72 calculated with the same Uniform Table that you will use next year, but using her age. She needs to immediately name her own beneficiary. Too many surviving spouses do not take any action, sometimes for years and do not even name their own beneficiary. She should make these changes within a short period after your death. Again, if she assumes ownership she will never have to deal with inherited IRA RMDs and the confusing Secure Act rules.
She will be responsible for completing your year of death TIRA RMD by the end of that year if you did not complete it. This can be done after she assumes ownership of the inherited TIRA.
If you are holding NUA shares in your taxable brokerage account (they cannot be held in an IRA or they lose NUA status), and your wife inherits those accounts, she will receive a basis adjustment on the entire value of the shares MINUS the amount of NUA per share. The actual NUA per share never gets a basis adjustment regardless of how many times they are inherited, therefore LT cap gains will be due on the NUA portion when shares are eventually sold. If the shares lose value, the amount of NUA per share at the time of sale would decrease. Diversification should always trump tax benefits, so holding too many shares of the same security can be very risky. For both diversification and accounting simplification, any dividends on these shares should not be reinvested in more of these shares.
Your surviving spouse will have many years to stretch her TIRA, and she will have no RMDs on the tax free Roth IRA. However, when she passes, her beneficiaries will become subject to the 10 year rule, and if she passes at age 72 or later, her beneficiaries will also have to take annual RMDs in years 1-9 if the proposed IRA Regs are adopted as submitted.
Pending legislation in Congress may increase the age when she has to start RMDs unless she has already reached RMD age. She could get another year or two beyond age 72 to start RMDs, but that will concentrate higher RMDs into fewer years. Of some concern is that a surviving spouse will also be filing single during those years, and therefore tax rates will be higher than filing jointly.
There is no requirement for her to deplete or sell off these inherited accounts, EXCEPT for the TIRA RMDs, but once she leaves the IRA to others, the 10 year rule will come into play in most cases for the successor beneficiary of the TIRA and Roth IRA. There are a few exceptions to that.

Permalink Submitted by Ron Corcoran on Sun, 2022-09-11 18:42

Thank you very much! This is very helpful! If I may follow-up in a few areas.. In the first part of your reply..Why would wife get two RMDs prior to assuming ownership of my TIRA? In the second part of reply.. Wife responsible for my RMD in year-of-death.. is this a third or same as one of RMDs from part 1 reply? In third part of reply.. Stock is split across 3 companies.(my feeble sort of diversification) One’s “heavier” which I will happily reduce if price gets back up there. Tough to do since heirs have a tax advantage. I use DIV to pay taxes. In fourth part of reply.. What is meant by “stretching” TIRA? (I assume just making it last longer) I suggested reducing it with Roth conversions, within limits (tax brkt or IRMAA) to minimize RMD req’d. At some point tho, I guess we’re just paying taxes for the heirs. In fifth part of reply.. I hadn’t thought about filing “single”. This can reduce the “window” for her conversions, smaller tax bracket and lesser IRMAA limit. In the last part of reply.. I thought there was a five year depletion requirement on inherited IRA? Not sure where I got that idea.. Is there a scenario where that exists? I know the Roth must be 5+yrs old. Thank you very much for your time and willingness to share your knowledge and expertise. Sincerely, Ron

Permalink Submitted by Alan - IRA critic on Sun, 2022-09-11 19:50

Sorry, I made a typing error that I just edited in the second line. In my prior post I meant to indicate that two inherited IRA accounts would be created, not two RMDs. I changed “RMDs” to “IRAs” and now it should make sense. She will still have to complete your year of death RMD if you did not.
You have 3 different NUA shares in your taxable brokerage? Were these from employer spin offs or acquisitions?
Yes, stretching an inherited IRA just refers to use of the applicable life expectancy RMD requirement, and avoiding taking out much more than such RMD to make the IRA last as long as possible. Accordingly, there will be more left for successor beneficiaries.
The 5 year rule only applies when the IRA is left to the estate and the owner passes prior to RBD. There is a new 10 year rule for deaths after 2019 (Secure Act) that applies to most non spouse beneficiaries.