Treat as your own options
Spouse beneficiary is 53 and inherits an IRA from her 75 year old husband. She wants the ability to access the money without penalty prior to 59.5 if she needs it so she moves the assets to an inherited IRA. Rules for an inherited IRA owned by a spouse state that distributions must begin by 12/31 of the year after death because the deceased owner is over 70.5, however she doesn’t take the required distributions and in doing so makes a deemed election to treat the IRA as her own. Three years later, she needs some money and takes a distribution from the inherited IRA that is less than the RMD. Is she now required to take the full RMD amount from the inherited IRA and will she have to take RMDs going forward based on the inherited IRA rules unless she rolls it to her own IRA? Or can she leave it in the inherited IRA with no RMDs because of the deemed election and still have penalty free access to the funds? It seems too good to be true that she could have a deemed election to treat as her own so no RMDs but also have access to the funds penalty free as a death distribution from the inherited IRA.
Thanks for any help with this
Permalink Submitted by Alan - IRA critic on Mon, 2015-10-19 17:31
Once she failed to take the RMD as required as a beneficiary, she defaulted to ownership of the IRA regardless of the fact that the IRA may still be incorrectly titled as an inherited IRA. This makes for an awkward inconsistency between the title of the IRA, the 1099R, and the actual RMD rules. It is not clear whether the IRA custodian is aware of these default rules and may even issue a 1099R with the death benefit code 4. Technically, she owes the 10% penalty because she actually owns the IRA now and took a pre 59.5 distribution. As the owner she has no RMD requirement until her own RBD. She should have the IRA re titled as the owner, and then pay the 10% penalty if the 1099R is not properly coded. Note that the RMD rules also state that when the ownership default rules take place, the surviving spouse is treated as if they owned the IRA for the entire year.