99% Rule

Submitted by Louis Solly on Mon, 2017-06-19 23:13

Recently read your article on the “99% Rule” and we discussed it in our staff meeting. There was a lot of confusion. Can you clarify how a spouse that inherits an IRA, and is under age 59 1/2, can establish an inherited IRA, then at a later date execute a spousal rollover of that same IRA? At that point, would the spousal rollover IRA need to be kept separate from any IRA accounts that the surviving spouse owned before the other spouse died?



Submitted by Alan - IRA critic on Tue, 2017-06-20 00:07

  • I cannot pull up the article you reference, but will address your question in general terms.  A spousal IRA beneficiary can have the inherited IRA titled in beneficiary format and keep it that way indefinitely. At any point they can then have it retitled as as owned IRA. There is no deadline, but once they have acquired ownership of the IRA either by request or by default (for failing to take out their full beneficiary RMD) the account cannot go back to beneficiary status.  The most common reason for starting out as the beneficiary is that if the surviving spouse needs to take distributions prior to reaching 59.5, they can do so without penalty from the beneficiary IRA as the distribution will be coded 4 on the 1099R to indicate a death distribution. However, an older surviving spouse who is the sole beneficiary may continue beneficiary status beyond 59.5 because RMDs do not begin until the year the deceased spouse would have reached 70.5. This delays RMDs longer when the surviving spouse is older.
  • When the spouse decides to change the status to ownership, they can simply roll the IRA over to another IRA account they already own. But if they take a distribution, they can only roll over the amount in excess of their beneficiary RMD amount. Afterwards there is no need to keep the former inherited IRA a separate account.
  • There are some RMD related situations that depend on whether the the spouse is considered the sole beneficiary of the inherited IRA or not. For example, the surviving spouse can only assume ownership of an inherited spousal IRA if they are the sole beneficiary. They can also only delay beneficiary RMDs until the year the deceased spouse would have been 70.5 if they are the sole beneficiary.

 

Submitted by Louis Solly on Tue, 2017-06-20 23:18

Thanks for the clarification!

Submitted by David Mertz on Tue, 2017-06-20 02:22

The question refers to this:  https://irahelp.com/slottreport/99-rule-spousal-beneficiaries-retirement-accounts

Submitted by Alan - IRA critic on Tue, 2017-06-20 03:59

Thanks DMx for posting the article. There are many aspects to spousal options and it actually can become quite complex. In addition, there articles like this that address most of the aspects are few and far between. Basically, since I had never heard of any 99% rule, it is what I pretty much expected which is a very rough estimate of the % of time that a certain option correctly applies. 

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