How Do I Take My Deceased Spouse’s 2016 RMD?

By Jeffrey Levine and Beverly DeVeny
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This week’s Slott Report Mailbag looks at several retirement planning complexities, including required minimum distribution (RMD) responsibilities for a non-spouse beneficiary and Social Security benefits for a divorcee. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

My spouse passed away in 2015. He was receiving an RMD from his 401(k). I was told by his ex-employer that for 2016, I will be required to take a RMD based on his age vs. mine. I am getting different answers from several financial advisors. Is this correct?

Can you steer me in the right direction?

Thank You,

Patricia Washo

Answer:
Sorry for your loss. No, that’s not correct. If your husband passed away last year (2015), then the only RMD that you would take based on his age would be any RMD he was supposed to take for 2015, but had not yet done so at the time of his passing. Your RMD for 2016, on the other hand, should be based on your age at the end of this year – whether that RMD is calculated as a beneficiary or as an owner will be determined by whether or not you’ve maintained the account as an inherited account or moved it into your own name.

You should also carefully analyze whether or not it makes sense to keep the money in the 401(k) or roll it over to an IRA or inherited IRA. Making that decision prior to December 31 of this year COULD make a big difference in how fast plan funds need to be distributed.

2.

Dear Slott Report,

I am a teacher, turning 66 in June, still working full-time with full medical benefits, and have one year to go to reach the full 25-year mark that my district requires to retire with top tier benefits. While I am not actually planning to retire in June 2017, that is the point, at the age of 67, that I can with optimum circumstances.

I am divorced from a 25-year marriage (divorce was 12 years ago), and it is my understanding that the day I turn 66, I can file a Restricted application with Social Security – even though I am still working full time – and collect half of my ex-husband’s benefit, with no penalty deduction due to my own salary since I will then be FRA (full retirement age), while my own benefit continues to accrue until I turn age 70, at which point I plan to switch over to my own.

My questions are:

1. Am I correct that this can be done within the current rules of Social Security? I was born before 1954, which I believe ‘grandfather’s’ me into still being able to use this strategy.
    
2. What is the formula for planning how long it might take for the catch-up of ‘missed income’ from not filing on my own record in June ’66? I am in great health, parents passed away in their mid-80s, and many relatives on the side of the family I most take after are living today in their late 90s, so I expect to chug along for quite a long time!

Thank you,

J

Answer:
The answer to your first question is yes. You can file a restricted application when you reach your full retirement age and claim half of your ex-spouse’s benefit without impacting your own.

In terms of calculating how long it will take to “break-even” from your missed income, there are many software programs out there and simple calculators that can help you do this. However, given your projected life expectancy, there’s little doubt that the strategy you’ve laid out – restricted application at 66 and switch to your own benefit at 70 – is the best path forward given the information currently available.

3.

I have an existing non-deductible Traditional IRA with a balance of $15,000; $12,000 of this amount is basis. In October 2015, I made a new contribution of $6,500 to my Traditional IRA. I realized in early February, after filing my taxes, my income would have allowed my 2015 contribution to go into a Roth IRA.

In reading Publication 590, I realize if I recharacterize it is viewed as if my original contribution in October 2015 went directly into a Roth IRA.

My question(s):

1. If my October contribution of $6,500 earned $200, is this a taxable amount to be included on my tax return for 2016? If, as the IRS indicates, the recharacterization is viewed as my contribution going into the Roth, none of this $200 gain is taxable. Is this correct?
    
2. I realize when CONVERTING an IRA to a Roth, ALL Traditional IRA balances need to be included in the calculation for the taxable and tax-free portion of the conversion. With a recharacterization, this is not the case, correct?  Going back to paragraph 1, my existing balance of $15,000 has nothing to do with the recharacterization.

Thank you for your assistance.

John Furrer

Answer:

1. Correct. Your $200 of earnings will not be taxable if you recharacterize your traditional IRA contribution to a Roth IRA contribution. A recharacterization treats the contribution as if it was always in the “new” account, so your $200 of gain will be treated as though it grew in the Roth IRA.
    
2. Not exactly. If you made the contribution into your old traditional IRA, then all the gains and losses, within the whole account, must be aggregated to determine the net income/loss that should be moved to the Roth IRA when you make the recharacterization. So if you used your new contribution money to buy $6,500 of an investment that went up $200 since the contribution, but the rest of the account lost $200 since that time, you’d be even in the eyes of the tax rules and the only thing that would be moved to the Roth IRA would be the $6,500 contribution.