Younger Spouse Dies Inherited IRA Beneficiary?
We have a spouse that was 50 years old that passed away. His 61 year old spouse is the beneficiary of the IRA. It is my understanding that she can choose to combine with her IRA or keep it separate and take it as an Inherited IRA. If she takes as an inherited IRA there is no 10% penalty for withdrawal before 59.5 and she can now use his age 72 for RMDs instead of hers. Assuming this is correct I have two questions. She is not subject to the 10 year rule for inherited IRAs because she is the spouse, correct? Also, she will name her daughter the beneficiary, if she dies, then her daughter will be subject to the 10 year rule, correct? Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2020-09-09 22:59
While over 59.5, distributions from her own IRA would be penalty free, she could avoid any RMDs for the next 22 years (instead of 11) by maintaining the IRA as a beneficiary IRA. She is not subject to the 10 year rule because she is a eligible desigated beneficiary (EDB). Upon her death, daughter will be subject to the 10 year rule in most cases. But if daughter was disabled or chronically ill, she will get a new life expectancy stretch if mother either has elected ownership or passes prior to the end of the year husband would have reached 72.
Permalink Submitted by Ryan Smith on Thu, 2020-09-10 20:14
So if this is the case why would spouses taking it as a Beneficiary IRA not be the default option? No 10% withdrawal penalty, access to the funds before 59.5. Especially if the living spouse is under 59.5. Is there a CON to the PROs that we are missing?
Permalink Submitted by Alan - IRA critic on Thu, 2020-09-10 21:27
The deceased spouse is muchmore likely to be older than the survivor, so the RMD deferral benefit for the surviving spouse would usally not apply or be much shorter in duration. And the spousal rollover will be needed at some point to reduce RMDs since the Uniform Table produces a much lower RMD than the single life table. That said, if the surviving spouse was taking beneficiary RMDs prior to Secure, the successor beneficiary would have lost out on the lower designated beneficiary RMD divisors. The Secure Act has basically eliminated that penalty for successor beneficiaries who now get the 10 year rule either way. If the successor beneficiary would be an EDB, they are usually better of if the surviving spouse had done the spousal rollover, since they would avoid the 10 year rule.