10 Year Rule – Spouse
Can an “eligible designated beneficiary”, such as a spouse, choose to use the 10 year rule which is available to “designated beneficiaries” (non-spouses)?
Yes, that spouse may avoid taxable RMDs. However, if the IRS were to provide the 10 year option and the spouse lives 7 years, their beneficiary will have 3 years left to drain the account, instead of 10 additional years. A key element of the value of this option is the difference in tax rates between the spouse and the successor beneficiary beneficiary when applied to the concentrated income spread over fewer years.
If the surviving spouse tried to use the 10 year rule before the regs are published and the IRS ends up saying that the 10 year option is not available to a surviving spouse, would the surviving spouse be looking at possible penalties from the IRS for not taking one or more required RMDs?
They would owe the 50% excess accumulation penalty for each year, but this is easily avoided by making up the delinquent RMD and filing a 5329 for each year to request a penalty waiver. These waivers are almost always granted.
The IRS will eventually release Regs, but it is possible that the Regs overlook this question entirely, despite many taxpayers inquiring about it. If they say nothing, that would likely mean no 10 year option for EDBs. The Secure Act Regs have clearly been waylaid due to Covid related issues and Congress changing the tax code almost monthly.
Permalink Submitted by Alan - IRA critic on Thu, 2021-03-25 16:51
The Secure Act does not provide any such option, however when the IRS gets around to publishing the Regs there is a chance this could be allowed. Generally however, the intent of the Secure Act is to shorten distribution periods from prior law, so extending them runs counter productive to their intent. As for a surviving spouse, after reaching age 59.5 they would normally elect to become the owner of the IRA rather than maintaining the account as a beneficiary.
Permalink Submitted by Dan Albertson on Thu, 2021-03-25 17:32
Thanks for the response. I agree that the intent was to shorten distribution periods for “designated” beneficiaries while allowing “eligible designated” beneficiaries to continue to have a longer distribution period. The circumstance arises with an elderly surviving spouse whose life expectancy is less than 10 years. If the 10 year rule applied, the surviving spouse could arguably avoid any RMDs (and resulting taxes) during their lifetime, leaving the IRA to a successor beneficiary.