Surviving spouse opting for out-in-10 under SECURE?

Submitted by Robert Vashko on Thu, 2020-06-04 17:19

In reading the language of SECURE, it seems to me that a lifetime stretch payout is optional for an eligible designated beneficiary. If they want, they could opt for the new out-in-10 payout instead, correct?

I am thinking of a hypothetical surviving spouse beneficiary who is much younger than the deceased IRA owner. I know that a SS bene doesn’t have to take stretch RMDs until the decedent IRA owner would have hit their RBD. I also know that a SS bene can opt for the spousal rollover at any time.

So let’s say IRA owner was 70 when they died this year. Did not hit 70.5 in 2019, so under SECURE, their RBD isn’t for two more years (i.e., when they would have hit 72).

SS bene is only 52. They do not want to do spousal rollover because while they don’t anticipate needing the money, they don’t want a 10% penalty issue if life throws them a curve-ball and they later do, in fact, need to draw income from the account prior to 59.5. So they maintain bene status.

Now, in a stretch scenario, in two years (2022), when deceased spouse would have hit RBD, SS bene (who would then be age 54) will have to start taking stretch RMDs off Table II, correct?

Instead, could SS bene opt today (in 2020) to *not* be treated as an EDB and place themselves under the out-in-10 option, leave the account alone for nine years with no RMDs due, and then do the spousal rollover in year 10, before the 10th anniversary of death?

The SS would now be 62, the 10% penalty is moot, they avoided 5-6 years of bene RMDs (i.e., between ages 54 and 59.5) in the stretch scenario, and have no RMDs for another 10 years after that.

I recognize that this is a very specific situation, but for a SS bene who wanted to maintain bene status without having to take bene RMDs that would normally be due in a stretch scenario, I can’t find a reason this wouldn’t work. Am I missing something? If not, am I over-engineering it?



Submitted by Alan - IRA critic on Thu, 2020-06-04 20:59

  • In two years when beneficiary RMDs must begin, the sole surviving spouse beneficiary would use Table I, not II. But they would recalculate every year, meaning that instead of reducing the first divisor by 1.0, they would re enter Table I every year to determine the new divisor. Only a sole surviving spouse can “recalculate”, in other cases a beneficiary would have to reduce the first year divisor by 1.0 each year.
  • To your main question, I don’t think the Secure Act is clear on this. But first, it should be noted that pre Secure, a sole surviving spouse DID have the option of electing the 5 year rule (death prior to RBD), but it was rarely done, possibly because of the risk of doing that. Almost all surviving spouses elected LE under which sole SSs did not have LE RMDs until deceased spouse would have reached RMD age. However, if the SS elected the 5 year rule and overlooked the end of the 5 year period, they lost the ability to do the spousal rollover. Due to this risk, almost no SS elected the 5 year rule. Now if this is allowed under Secure’s 10 year rule, the same risk is there for spouse’s who make the 10 year election. What is different under Secure is that it does not matter what age the IRA owner passes. The question of the electing the 10 year rule for an EDB is probably not even on the short list for IRS ruling and there is a good chance when they finally get around to publishing Secure Regs, we still may not know.

Submitted by Robert Vashko on Thu, 2020-06-04 21:13

Thanks.Yes – I goofed on the Table II.  Table I is indeed correct.  Thanks for catching that.I also agree that this is a very uncommon fact pattern for the very risks you mentioned, and a very low priority for the Service, if it even qualifies as a “priority” at all.Your reminder that SS bene was able to opt for out-in-five pre-SECURE (as you said, extremely rare) makes me think that they could likewise opt for out-in-10 post-SECURE.  I would hate to be the advisor who advocates my hypothetical strategy and then no one remembers to execute the spousal rollover before the 10th anniversary of the IRA owner’s death.

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