Roth IRA – Spousal RMD requirement
I have a client whose husband passed away October 2006. He owned a Roth IRA with his wife as the primary beneficiary. We established the new Roth IRA account in November 2006 as a beneficiary Roth IRA and the account title is listed as IRA FBO wife’s name, Pershing LLC as custodian, Roth account b/o husband’s name (deceased). Is she required to take an RMD by the end of 2007? Or is she exempt because it is still considered a spousal rollover or exchange?
Many thanks for your advice!
Permalink Submitted by Al Fry on Thu, 2007-12-27 19:37
Sounds as if it was titled incorrectly as an Inherited Roth, rather than hers. I would get that corrected ASAP, so that it is clearly a rollover to herself. Then no RMD is needed.
Permalink Submitted by Bill Nelson on Thu, 2007-12-27 21:22
Ideally we’d like to change the title as you suggested, but I’m sure it can’t be done by the end of 2007. So, can the RMD for 2007 be skipped if the intent is to change the inherited IRA to a spousal IRA in 2008? Or have we essentially missed the boat on this opportunity and are now left with the option of either starting RMDs, or choosing the option which requires the account to be distributed within 5 years?
Permalink Submitted by Alan Spross on Thu, 2007-12-27 22:07
For an inherited spousal Roth, an inherited status would only be of benefit if distribution of earnings (last to come out under the ordering rules) was required by the beneficiary prior to account qualification, and avoiding the 10% early withdrawal tax on the earnings was an issue.
RMD requirement depends on the age of husband when he passed. If there is no RMD due for 2007, then no harm done if the account is not assumed till next year. What are both their ages?
Permalink Submitted by Bill Nelson on Thu, 2007-12-27 22:16
They are both over 70 1/2. I’m not sure why it was set up this way as I was not involved, but it seems that her only option will be either to take an RMD for 2007 and continue in future years, or to decide to distribute the entire account within the 5 years (technically 4 since 2007 is year 1).
Thanks.
Permalink Submitted by Alan Spross on Thu, 2007-12-27 23:47
Setting up an IRA in inherited status is not a permanent election for a spouse. The surviving spouse can elect to make the inherited IRA her own whenever she wishes, whether Roth or TIRA. Per Pub 590, p 35, “if you elect to be treated as the owner, you determine the RMD (if any) as if you were the owner beginning with the year you elect or are deemed to be the owner”.
Since there would be no RMD as a Roth owner for 2007, the election itself would eliminate the need for a 2007 RMD.
However, another path to the same conclusion exists. In the above quote note the reference “deemed to be the owner”. This is where the default rules come in per Pub 590, p 20, “Treating it as your own”. This rule indicates that if a sole spouse beneficiary fails to take an RMD as a beneficiary, they will be considered to have made the IRA their own. So even if she does nothing by year end, she will be deemed to have made the inherited Roth her own Roth in 2007.
This should take some pressure off year end communication if the IRA custodian does not act on her election to now assume the inherited Roth as her own.
Permalink Submitted by Denise Appleby on Tue, 2008-01-01 16:03
Also ( and maybe most important) , bear in mind that the spouse beneficiary ( of the Roth IRA) does not have the option to move the assets to an Inherited IRA, because :
• The custodian you mentioned uses the IRS model document, and
• The document does not allow the spouse to use the beneficiary options ( [url=http://www.retirementdictionary.com/Five-Year-Rule.htm%5Dfive year[/url] or [url=http://www.retirementdictionary.com/Life-Expectancy.htm%5Dlife expectancy[/url])
Therefore, no [url=http://www.retirementdictionary.com/Required-minimum-distribution.htm%5DRM… due from the account, and the custodian is [u]required [/u]to change the account to an non-inherited ( her own) [url=http://www.retirementdictionary.com/Roth-IRA.htm%5DRoth IRA[/url]…as per their own document.
Good news is no need to open a new account.