Spousal rollover – Slott report QA of 8/3/23

Submitted by Alan - IRA critic on Tue, 2023-08-08 15:22



Submitted by Alan - IRA critic on Tue, 2023-08-08 15:27

  • Q:   If I have the beneficiaries on my IRA listed as my wife (50%) and two children over 21 (50%), is my wife still able to move her half of the IRA into her existing IRA when I am gone?  Or does having the adult children as partial beneficiaries inhibit her ability to do a spousal rollover to combine it with her existing IRA?
  • A:  As long as your IRA is timely split after your death, your wife will still be able to complete a spousal rollover into her own IRA. This is often referred to as “separate accounting.” The deadline for your beneficiaries to set up separate inherited IRA accounts is December 31 of the year after your year of death. If that happens, your wife can do a spousal rollover. However, if this deadline is missed, your wife would not be permitted to do a spousal rollover and would be required to maintain the account as an inherited IRA.
  1. I disagree with that last sentence indicating the spouse will be stuck with an inherited IRA forever. The new spousal rollover limitations have received minimal attention, but they are significant due to the new imposition of a time limit of the later of the year the surviving spouse reaches 72  (now 73 with Secure 2.0) or the end of the year following their spouse’s death. Per p 254 of the proposed Secure Act Regs, this time limit also applies to the situations when the sole surviving spouse would default into ownership status by failing to take a beneficiary RMD.
  2. But missing this deadline for election to assume ownership only eliminates that option. Since the surviving spouse can still take a distribution from the inherited IRA and do a 60 day rollover (if they have one available) to their own IRA of any amount in excess of the inherited IRA RMD for that year, they can still complete the spousal rollover, albeit using this less favorable method of completing the spousal rollover. One of the reasons this is less favorable is that the inherited IRA RMD will be significantly higher than the Uniform Table RMD that would have applied had the election been possible. Main point is that the “spousal rollover” can be done by actual rollover as well as assumption. The actual rollover is not time restricted.
  3. I view this as troublesome for aged surviving spouses, since they have lost the favorable default provisions if they miss the deadline, which could be little more than a year after their spouse passed. Some may not even have a rollover available before that deadline as they may be have used a rollover in the prior 12 months. So this is yet another example of Congress applying a complex and uncalled for restriction in order to modestly accelerate tax revenue. Historically, surviving spouse have received very favorable treatment under the RMD rules, but now it is being clawed back. 
  4. The existing regulations are still effective prior to finalization of the proposed new Regs. Therefore, surviving spouses might want to assume ownership soon before the proposed Regs become final. There are plenty of issues in the proposed Regs beyond the main issue of annual RMDs within the 10 year rule.

   

Submitted by David Mertz on Wed, 2023-08-09 01:36

I noticed the same error on the day that it was published.  I was waiting to see if anyone else noticed and posted.  The ability to do a rollover to the surviving spouse’s IRA after the deadline to assume ownership is explicitly stated in the discussion included with the proposed regs.

Submitted by Alan - IRA critic on Wed, 2023-08-09 02:52

  • Thanks. The second QA in that same 8/3 Report may also be subject to question. The answer is copied next:
  • “Since you are inheriting an inherited an IRA, that makes you a successor beneficiary. I will assume your sister was taking stretch required minimum distribution (RMD) payments from the inherited IRA based on her own single life expectancy. As a successor, you will continue this exact same RMD schedule, using the same RMD factor that your sister was using. Essentially, you will step into her shoes for future RMD payments. Additionally, since you are a successor beneficiary, the 10-year rule also applies. So, continue RMD payments in years 1 – 9, but the account must be emptied by the tenth year after the year your sister’s death.”
  • There was another Slott report in the spring that highlighted the need for successor beneficiaries to determine the RBD status of the original owner. It stated that the LE RMDs being taken by the designated beneficiary must be continued ONLY if the owner passed post RBD. Looking through the proposed Regs, there is a clear example stating that the successor must continue the RMD schedule, but that example was in the death post RBD section. So does ALAR only apply to RMDs being taken by the owner?

Submitted by David Mertz on Wed, 2023-08-09 17:48

I think that the earlier Slot Report was accurate in saying that the need to take annual RMDs is based on whether the original owner died pre-RBD or post-RBD because the ALAR requirement is in section 401(a)(9)(B)(i) which applies when the *employee* dies post-RBD.  I don’t think that there is any guidance anywhere that bases the ALAR requirement on anything about how the original beneficiary was taking distributions.

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