“Hypothetical missed RMDs” under SECURE regs

Submitted by Robert Vashko on Wed, 2023-03-08 00:20

Trying to make sure I have a handle on this:

Husband and wife, both age 71 in 2023. Husband dies this year, naming Wife as sole primary bene on his IRA.

Even though she is an EDB, she opts to be treated as a non-EDB out-in-10 beneficiary. She does this so that she can avoid all RMDs for the next 10 years, and right before 12/31/2033, she plans to assume ownership of the contract so she can avoid the lump-sum distribution due at the end of the 10-year window.

She can do this if she wants (since there is no time limit on a spousal bene assuming ownership), but she will need to take out all of the Table III RMDs (based on her age) that she “skipped” during the 10-year window.

Is that it in a nutshell?



Submitted by Alan - IRA critic on Wed, 2023-03-08 03:37

  • That’s a good summary, but there is more to this, a road that the IRS will likely regret going down. I can imagine what the IRS will have to do to boil this down to understandable rules (mostly for widows no less) published in Pub 590 B.  If this survives the final Regs, the logical conclusion would be for surviving spouses to disregard the option of electing out of EDB treatment. It is surprising that this provision has garnered so little attention so far.
  • Another closely related restriction for spouses in the proposed Secure Act Regs is the time limit to elect ownership of the inherited IRA, and consequently a time limit for deemed ownership from failing to complete a beneficiary RMD or from making a regular contribution. Once this time limit passes, the surviving spouse must take an actual distribution (1099R), determine how much of that distribution is their beneficiary RMD, and only roll over the excess of that RMD to their own IRA. The one rollover limit per 12 months will apply. In the past, the missed beneficiary RMD is invariably much higher than electing ownership and using the Uniform Table for the year of election. The time limit for the spousal election is the later of the year the surviving spouse reaches 73, or the year after the year of spouse’s death. Again, this will affect all surviving spouses, not just those opting into the 10 year rule.
  • Sec 327 of Secure 2.0 will bring these spousal complexities from Secure 1.0 over to non IRA plans, where a sole surviving spouse can elect to be treated as the employee and use the Uniform Table, which will likely result in fewer spousal rollovers to IRAs. Spouses who do not make this election and continue as the beneficiary will be subject to similar rules that you outlined, except that some such plans may contain a mandatory 5 or 10 year rule to begin with, subjecting more spousal beneficiaries to retroactive RMDs when they either elect to be treated as the employee or to a rollover to their IRA. 
  • While these revamped spousal rules surprisingly have not received much attention to date from the financial press, I suspect that as the IRS finalizes the proposed Secure Regs, these rules are contributing to the inordinate delay. 
  • And Secure 2.0 is several times over more complex that Secure!

 

Submitted by Robert Vashko on Thu, 2023-03-09 00:04

Thanks again.  Yes, I too am surprised that all of this spousal stuff is not getting more press.  Perhaps the authors of all of these SECURE 2.0 articles are having trouble breaking these changes down into something concise and digestible.

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