81 Year Old IRA Dies, 54 Year Old Spouse is bene…

Submitted by John Frigeri on Thu, 2023-11-30 19:32

I apologize in advance if this has already been addressed.

-80-year-old Traditional IRA owner died this year PRIOR to taking RMD.

-Spouse is 55 years old and the sole beneficiary.

-Spouse does not want to establish an inherited IRA because they do not want to be subject to annual RMDs based on their life expectancy.

-QUESTION- If I transition the funds to the beneficiary’s own IRA, and the beneficiary satisfies this years RMD via disbursement from the IRA, the beneficiary will be assessed the 10% IRS penalty, correct? If the answer is yes, are we still able to register the account as an inherited IRA to satisfy the RMD with no penalty and then re-register the account as a normal IRA for the spouse to avoid the annual RMDs moving forward?

HELP!



Submitted by Alan - IRA critic on Thu, 2023-11-30 20:04

  • The surviving spouse needs to assess the potential need for funds prior to 59.5 in determining how much of the inherited IRA to roll over. Since the decedent’s 2023 RMD must be completed, the surviving spouse should establish an inherited IRA, take a penalty free distribution from the inherited IRA to complete the year of death RMD, then determine how much more they should retain in the inherited IRA to avoid the 10% penalty prior to 59.5 despite having to take beneficiary RMDs starting in 2024. 
  • The balance in excess of the above estimate can be distributed and a 60 day rollover done to the spouse’s own IRA. This is subject to the one rollover limitation for 12 months, so the spouse should be sure that they are eligible for a 60 day rollover. If the rollover is allowed, done after the year of death RMD is completed, and done before year end, none of it is treated as an RMD. If this is not done by year end, the 2024 RMD will have to be completed before rolling over an additional amount in 2024, etc.
  • Once spouse reaches 59.5, they should assume ownership of what remains in the inherited IRA and that will erase the beneficiary RMD for that year if it is not distributed prior to assuming ownership. Meanwhile, the spouse should understand that if they do NOT complete the beneficiary RMD while the IRA is still inherited, they default to ownership status which would result in beneficiary RMD elimination, but would also subject them to the penalty until 59.5.
  • To be clear, the spouse can maintain the inherited IRA with a selected balance, while rolling over the balance to an owned IRA that will not be subject to RMDs for many years.

Submitted by John Frigeri on Thu, 2023-11-30 20:42

  1. If the spouse is the sole beneficiary to the original IRA owner, they can chose to have a portion go to an inherited IRA and a portion to a standard Traditional IRA?
  1. Can I just transtion the RMD amount to an inherited IRA and close it out to satisfy the decedents 2023 RMD and roll the rest to a Traditional IRA
  • If the spouse decides to use an inherited IRA, they will be subject to an RMD based on theree life expectancy, correct? If the original owner died before the RBD, the spouse would not have to take RMDs until the original owner would have reached RMD age, correct?
  • If the spouse decides to use an inherited IRA and down the line convert to a Traditional IRA, that is considered a 60 day rollover? Even if it occurs at the same firm internally and a check is never issued to the client?

    • Submitted by Alan - IRA critic on Thu, 2023-11-30 21:05

    1. Yes, they can split the inherited IRA and roll over a portion to their own IRA. But after the year of death RMD is completed, the spouse elects to assume ownership of the entire remaining balance, if any funds are needed from the owned IRA before 59.5, the penalty will apply. That’s why keeping an amount in the beneficiary IRA provides protection from this penalty, even though a beneficiary RMD will be required on the amount left in the inherited IRA.
    2. Correct, but in this case the decedent was over RMD age, so beneficiary RMDs cannot be delayed. But the sole beneficiary spouse can “recalculate” the divisor by entering the table each year. That results in a lower beneficiary RMD than reducing the divisor by 1.0 each year.
    3. When the spouse decides to close the inherited IRA entirely, then a 60 day rollover can be avoided by electing to assume ownership of the inherited IRA. There is no distribution and no 1099R, and this will also erase the beneficiary RMD for that year, so is a better method than taking a distribution and doing a rollover. However, assumption cannot be done if any amount is to be left in the inherited IRA. Until the entire inherited IRA balance is eliminated, the only way to partially move funds to the owned IRA is by an actual distribution triggering a 1099R and the beneficiary RMD if not already completed.

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