RMD in Year of Death before Spousal Rollover
Husband passed away 2010 at age 76 before taking this year’s RMD on his traditional IRA. Wife is sole beneficiary, also 76. My understanding is that the wife has to take his RMD for 2010 before either assuming the account and treating it as her own, or rolling it over into a new account in her name. The beneficiary forms sent by the Big National Bank at which the IRA is held don’t make it clear how to do this, and the people who work at their retirement back office initially told me (until I pointed out what their instructions said) that the wife has to take that RMD from the account after she makes it her own or rolls it over. They are now planning on getting back to me on Monday but in the meantime I’d like to know how exactly banks usually do this. Is my understanding of when the 2010 RMD needs to be taken incorrect? If not, how does the wife take the 2010 RMD before making the money her own in some way? And is that RMD called a ‘distribution due to death’ by the IRS? I’m asking that last question because there’s a section on the bank’s standard IRA Withdrawal Form (which was not included in the bene IRA package) that allows for choosing that, making me wonder if that’s the form to fill out for the 2010 RMD.
Finally, is there some tax code section somewhere that spells all this out? Thanks.
Permalink Submitted by Alan Spross on Sun, 2010-06-20 03:50
Most of this is contained in IRS Reg 1.408-8, Q&A 5 copied below.
The beneficiary must re title the account before any distributions can be made after the death of the IRA owner. If the surviving spouse chooses to assume ownership, the RMD for the year of decedent’d death will be coded as a normal distribution (Code 7). But if the surviving spouse chooses to title the IRA as a beneficial owner, then the RMD amount will be coded as a death distribution (Code 4) since it is being paid to a beneficiary rather than an owner.
The RMD for the year of death can be taken anytime prior to year end. Quite often this gets overlooked especially in late year deaths, but the beneficiary needs to take out the RMD ASAP. If after the year of death, the IRS will typically waive any penalty if requested due to reasonable cause (Inst for Form 5329, p 6).
With the surviving spouse being the same age as the deceased spouse, she should assume ownership. There are disadvantages such as a higher RMD requirement in future years if she continues as a beneficiary. Surviving spouses most often use beneficiary status if they are under 59.5 in order to take distributions without penalty. The IRA will also have to be distributed faster if her children are her successor beneficiaries than if they are designated beneficiaries pursuant to her assumption of ownership.
Copy of IRS Reg:
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Q–5. May an individual’s surviving spouse elect to treat such spouse’s entire interest as a beneficiary in an individual’s IRA upon the death of the individual (or the remaining part of such interest if distribution to the spouse has commenced) as the spouse’s own account?
A–5. (a) The surviving spouse of an individual may elect, in the manner described in paragraph (b) of this A–5, to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if distribution thereof has commenced to the spouse) as the spouse’s own IRA. This election is permitted to be made at any time after the individual’s date of death. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust. If the surviving spouse makes the election, the required minimum distribution for the calendar year of the election and each subsequent calendar year is determined under section 401(a)(9)(A) with the spouse as IRA owner and not section 401(a)(9)(B) with the surviving spouse as the deceased IRA owner’s beneficiary. However, if the election is made in the calendar year containing the IRA owner’s death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A–4(a) of §1.401(a)(9)–5, to the extent such a distribution was not made to the IRA owner before death.
(b) The election described in paragraph (a) of this A–5 is made by the surviving spouse redesignating the account as an account in the name of the surviving spouse as IRA owner rather than as beneficiary. Alternatively, a surviving spouse eligible to make the election is deemed to have made the election if, at any time, either of the following occurs —
(1) Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B); or
(2) Any additional amount is contributed to the IRA which is subject, or deemed to be subject, to the lifetime distribution requirements of section 401(a)(9)(A).
(c) The result of an election described in paragraph (b) of this A–5 is that the surviving spouse shall then be considered the IRA owner for whose benefit the trust is maintained for all purposes under the Internal Revenue Code (e.g., section 72(t)).
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Permalink Submitted by Diane Ryan on Sun, 2010-06-20 16:45
Ah, thanks so much for posting the IRS regs. Here’s the quote from those regs that I am concerned with:
“However, if the election is made in the calendar year containing the IRA owner’s death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A–4(a) of §1.401(a)(9)–5, to the extent such a distribution was not made to the IRA owner before death. ”
So, I get that the account has to be retitled before the last RMD with respect to the decedent is taken, since a dead person can’t move money out of accounts, but my understanding from Ed Slott’s books and the NOLO Press book on this subject is that the IRS will disallow that RMD if taken after the spouse rolls over the account or makes it her own, so how as a practical matter is that RMD taken? And once again, if I have that right about disallowance of the rolling over of a RMD, what are the tax code regs that spell that out?
Permalink Submitted by Alan Spross on Mon, 2010-06-21 03:50
Here is a copy of the referenced IRS Reg 1.401a(9)-5 that supplements the prior copied IRS Reg. All this basically says is that if the surviving spouse assumes ownership IN THE YEAR of death of decedent spouse, the RMD for that year is the one that the decedent would have taken had they lived all year:
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Q–4. For required minimum distributions during an employee’s lifetime, what is the applicable distribution period?
A–4. (a) General rule. Except as provided in paragraph (b) of this A–4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee’s date of death is determined using the Uniform Lifetime Table in A–2 of §1.401(a)(9)-9 for the employee’s age as of the employee’s birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee’s death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee’s death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.
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The RMD cannot be rolled over, but there is nothing that disallows ownership assumption if the RMD remains unsatisfied. The reference “distributed to a beneficiary” includes the surviving spouse, whose status at the time of death IS that of a beneficiary, whether they assume ownership later or not. If the IRA is assumed, the RMD remains outstanding and subject to the 50% excess accumulation penalty if not waived for reasonable cause. The first distribution from the account is deemed to constitute that outstanding RMD of the decedent, whether the IRA is titled in beneficiary form or ownership had been assumed. The primary purpose of all these IRS Regs is making sure that any RMDs due are distributed. The last thing the IRS would desire is to have an RMD disallowed. But if a distribution is taken that is deemed to be the RMD it cannot be rolled over and would become an excess contribution to the IRA.
You don’t see this topic discussed very often, but many IRA owners pass with many years of RMDs not taken, not just the RMD for the year of death. All these past RMDs must be made up by the beneficiary, but probably much of the delinquent RMDs fall through the cracks.