By Ian Berger, JD
As discussed in the October 18 Slott Report, spousal beneficiaries of IRAs can take advantage of certain payout rules that aren’t available to non-spouse beneficiaries.
For example, a surviving spouse who remains a beneficiary can defer required minimum distributions (RMDs) until the year her deceased spouse would have turned age 72. Also, when RMDs begin for surviving spouse beneficiaries, the spouse can go back to the IRS Single Life Expectancy (SLE) Table each year to recalculate her life expectancy factor.
Instead of remaining a beneficiary, a surviving spouse can roll over inherited IRA funds to her own IRA (a “spousal rollover”). A spousal rollover can be done at any time. It often makes sense for a surviving spouse to remain a beneficiary until she turns 59 ½ and then do a spousal rollover. This allows the spouse to tap into the IRA funds without worrying about the 10% early distribution penalty.
Doing a spousal rollover allows the spouse to be treated as the owner of the rolled over funds. This permits the spouse to defer RMDs on the rollover dollars until she reaches her own required beginning date (i.e., April 1 of the year following the year she turns 72). A rollover also allows the spouse to calculate her RMDs by using the Uniform Lifetime Table (rather than the SLE Table), resulting in significantly smaller RMDs. (Note that, despite the term “spousal rollover,” the movement of money from the deceased spouse’s IRA to the surviving spouse is typically done via direct transfer.)
A less obvious perk of a spousal rollover is that the IRS treats it as retroactively effective back to January 1 of the year it is done. (Different rules apply if the rollover is done in the year of the IRA owner’s death.) This means that a surviving spouse who has been taking RMDs as an inherited IRA beneficiary won’t need to take a final RMD on the inherited funds in the year of a spousal rollover. And, since RMDs are now based on the spouse’s own age, a spouse who is younger than age 72 won’t need to take RMDs on the rolled-over funds either.
This came up recently in the case of a 57-year-old surviving spouse who elected to remain an IRA beneficiary because she needed the inherited IRA funds. The surviving spouse has been subject to annual RMDs because her husband was taking RMDs when he died. Now the surviving spouse is remarrying and no longer needs the funds, so a spousal rollover makes sense. Even though the rollover won’t be done until later this year, it will be treated as occurring on January 1, 2021. This allows the spouse to avoid a 2021 RMD on the inherited funds. And, she won’t need to take RMDs on the rolled over funds until she turns 72.