Back to school time isn’t just for the kids. Our most recent monthly webinar was entitled “Twelve Things Every Advisor Should Know When a Spouse Inherits an IRA.” It featured our own Dean Mioli (the self-proclaimed Tax Doctor) and I have to say, more than 12 tips. Call it extra credit work, call it a bonus, but Dean is now answering questions from the webinar here. Don’t miss the extra bonus at the end.
Q: I have a client born on 9/15/47. Accordingly, she will be 70½ on March 15, 2018. Is her initial required minimum distribution (RMD) on this date or one year later?
A: The required beginning date gives a lot of people difficulty. The rule is that the required beginning date (RBD) is April 1 the year after you reach age 70½. Your client has until April 1, 2019 to take her first RMD, since that is the year after she turns 70½. If she waits until 2019 to take her 2018 RMD, she will also have to take her 2019 RMD by the end of 2019. For most IRA owners, it does not make sense to double up on distributions.
Q: If a spouse over 70½ passes away before taking her RMD for the tax year, does the surviving spouse beneficiary need to take the deceased’s RMD?
A: If a spouse inherits an IRA from a spouse who dies after the RBD, the inheriting spouse MUST take the RMD for the year of death, if their deceased spouse had not already taken it.
Q: What about an inherited Roth or an IRA from a spouse who has not reached their RBD?
A: No RMD is required for the year of death.Q&A on spousal inheritance: IRAs, RMDs and RBDs (oh my!) Click To Tweet
Q: If a deceased divorced man does not change the beneficiary from his ex-wife, is she entitled to a spousal rollover?
A: The ex-spouse is treated as a non-spouse for inherited IRA purposes. A non-spouse beneficiary can never move the inherited IRA funds into an IRA in their own name. That is considered to be a total distribution of the IRA, which means income tax is due on the entire account balance. One small piece of good news: the 10% early distribution penalty would not apply, since a distribution due to death is an exception to the penalty.
This scenario is reminder to check beneficiary designations regularly at the custodian and make any necessary adjustments.
Q: Under what circumstances does it matter if the decedent spouse was at RBD – that is, already taking RMDs – for spouse or non-spouse?
A: As mentioned earlier, a distribution will be required when the IRA owner died after the RBD and did not take the distribution; this applies to both a spouse and a non-spouse. For a non-spouse to calculate his RMD, he would go to the single life expectancy table in IRS Publication 590-B and look up his age in the year after the IRA owner’s death. The beneficiary will use the age he is as of the end of the year. He will only go to the table one time. In each subsequent year, he will subtract one from last year’s factor to get the current year factor.
Spouses have choices; they could treat the inherited IRA as an inherited IRA or could do a spousal rollover. If a spouse treats the IRA as an inherited IRA, she has the ability to recalculate life expectancy using the single life expectancy table, which generally results in smaller RMDs.
If the spouse assumes the IRA (makes it “her own”), she may not even be required to take future distributions until the year after her RBD. The rule is that the required beginning date (RBD) is April 1 the year after you reach age 70½. So if the spouse was 63, and assumes the IRA, her RMDs would not start for several years.
Q: Does a beneficiary need the social security number of the decedent when inheriting an IRA?
A: It’s not necessary for reporting purposes, but some firms may require it when the beneficiary is claiming the benefits. SEI has a line for the deceased’s SSN on our Inherited IRA Beneficiary Election Form.
I hope the Q&A answered some of your questions from the webinar. The most important thing is make sure your clients know to call you before doing anything when they stand to inherit an IRA.
Extra credit bonus
Understanding options, obligations and deadlines concerning a deceased owner’s IRA account can help you make the best choices for your client. Use our Guide to IRA Beneficiary Options to walk you through the choices that you may have and the rules concerning distributions from the account.
Dean Mioli is Director of Investment Planning for the SEI Advisor Network. In this role, he supports the delivery of advice-driven asset management solutions for our advisors and their clients.