Spousal inherited IRA options & deadlines

Submitted by Angela Colling on Tue, 2023-10-17 21:44

We have a client (age 70) who recently advised her spouse (age 76) died on 9/6/2023. Trying to verify best options & rules for inherited spousal IRA. The decedent took the current year RMD prior to death and surviving spouse is the sole beneficiary. Financially, she does not need the funds so primary goal is to mitigate tax consequences. The rules are confusing but as I understand, surviving spouse has the option to convert deceased spouse’s IRA to either a beneficiary IRA or transfer assets into either a new IRA in her name only OR transfer assets into her already existing IRA.

Questions:
1. My understanding in this situation as to mitigating taxes, best option is for surviving spouse to treat IRA as her own rather than create a beneficiary IRA to delay RMDs until she reaches RMD age, correct?
2. Are there any deadlines to make this determination?
3. Is surviving spouse required to re-retitle or can she keep it in her deceased husbands IRA account? Are there ramifications for taking no action and keeping assets in the decedent’s IRA?
4. Is it advantageous to keep the inherited IRA assets (even if treated as her own) separate from her current IRA that is in her name?

Anything else I’m missing??

Thanks so much for your insight!!



Submitted by Alan - IRA critic on Tue, 2023-10-17 23:52

  1. Yes, given that she is over 59.5 the optimal solution here is to immediately elect to assume ownership of the inherited IRA. There are no downsides for this. Her owned IRA RMDs begin at age 73.
  2. There are two ways to acquire ownership of the inherited IRA. The preferred method is an election to assume ownership and this is a non reportable transfer. The other method is to take a distribution from the inherited IRA and do a 60 day rollover of the amount in excess of the beneficiary RMD. The assumption method however will have a new deadline under the Secure Act proposed Regs. This deadline is the later of the end of the year after the year of death (12/31/2024) or the end of the year that the surviving spouse reaches RMD age (73). After that deadline she can only acquire ownership by the distribution and rollover method which is inferior. There is no reason for her to delay assuming ownership – sooner the better. 
  3. Even if she wanted to maintain the IRA as beneficiary, she needs to have it retitled (submit death Cert and personal contact info, and SSN) in beneficiary format. Otherwise she has no control of the investments and the account has no beneficiary. She cannot take a distribution and therefore will miss RMDs. Note that most custodians will first transfer the funds to a new beneficiary IRA account, and that new account is the one that she should elect ownership of. The custodian will probably then transfer the funds into a new account that she owns in all respects. None of these transactions are reportable on a 1099R or on her tax return. 
  4. Once she elects ownership, there is no reason that the funds cannot be transferred into her existing IRA allowing her to simply maintain one account. Her beneficiary needs to be updated ASAP.
  5. Note that it’s possible that the decedent had basis in their IRA from non deductible contributions. If so, Form 8606 should be included with each year’s RMD. She will inherit the remaining basis and should report it on Form 8606 line 2 of the next Form 8606 she is required to file. Basis represents the portion of all her distributions that are non taxable. This is often overlooked by surviving spouses, but should be easy to determine just be checking their recent returns for Form 8606.

Submitted by Angela Colling on Wed, 2023-10-18 14:11

Thank you so much! This was so helpful. A followup question, just curious what happens to the decedent’s account if the surviving spouse dies prior to taking any action?

Submitted by Alan - IRA critic on Wed, 2023-10-18 15:16

  • A 60 day rollover into her personal IRA after receiving a distribution would be considered a spousal rollover, but technically an election to assume ownership is done by having the custodian transfer the funds into an owned IRA which is not a distribution and not reported on any form. She would not receive a check or be charged with a rollover. Therefore, just notifying the custodian that an election to assume ownership is being made is easier and more efficient than requesting a distribution.
  • There is another rule that I did not mention earlier. If she fails to take her full beneficiary RMD, she will automatically default to ownership even though the IRA has never been retitled. This default rule has always existed and if it is triggered the custodian should be alerted that the funds should be transferred to an owned IRA where the registration conforms to the actual ownership situation. Defaulting to ownership has the same deadline as outlined above for an actual request to assume ownership and this new deadline is new per the Secure Act Regs. Defaulting to ownership will reduce the late RMD for the year of default to the Uniform Table RMD, which is lower than the beneficiary RMD, and therefore it a penalty for missed RMDs is ever levied, it will be less. 

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