By Zinner & Co.
Tax Services Department
IRA (Individual Retirement Account) rules are complex when it comes to annual contributions and timing for required minimum distributions (RMDs), let alone the differences between traditional and Roth accounts. Many understand the idea of an IRA and the concept of planning for life events, but few realize the impact those choices can have on others.
The benefits of an IRA can be maximized when the deceased IRA owner names the spouse as primary beneficiary. Since the main benefit of any retirement account is tax deferral and tax-free growth, it is essential the surviving spouse acts quickly to continue to maximize the benefits.
The following scenarios discuss tax consequences when surviving spouses are the sole beneficiaries of traditional IRAs. The surviving spouse generally has a few choices when he/she inherits an IRA.
- First, the surviving spouse may retitle the inherited IRA into his/her own name
- Second, the surviving spouse may transfer the amount from the inherited IRA into his/her own IRA. If one of these two options is chosen, the required minimum distributions will begin when the surviving spouse becomes age 70.5. The benefit to this choice is that the required minimum distributions are calculated using the joint life expectancy table found in Reg. 1.401(a)(9)-9. This table is advantageous for taxpayers, as the RMDs will be less than if calculated with the single life expectancy table (discussed below) and therefore, the IRA assets will continue to grow and utilize the tax deferral benefits.
- The surviving spouse also has the option to leave the IRA in her/her spouse’s name. In this case, the mandatory distributions for the beneficiary depend on whether the decedent passed before or after required minimum distributions began. If the decedent passed before reaching age 70.5, the surviving spouse can elect to begin taking RMDs based on the surviving spouse’s single life expectancy tables, found in Reg. 1.401(a)(9)-9,Q-1. The RMDs shall begin by December 31 of the year following the year of the deceased spouse’s death.
- The surviving spouse may also defer all RMDs until December 31 of the fifth year following the year of the deceased spouse’s death, but must completely withdraw the account by December 31 of the fifth year. In this scenario, the first option will allow the account to continue to grow while defer taxes, but are neither are optimal compared to the first two choices discussed above.
- If the decedent passed after reaching age 70.5, the surviving spouse must begin taking RMDs based on the decedent’s single life expectancy tables, found in Reg. 1.401(a)(9)-5,Q&A-4. The RMDs shall begin by December 31 of the year of the deceased spouse’s death, if not already taken already.
The idea of stretching out an inherited IRA is most beneficial as it will allow the IRA to continue to grow tax-deferred until RMDs are required. Original owners of IRAs may want to consider meeting with the beneficiaries and tax advisors to discuss planning opportunities and wishes of the original owner before the original owner’s death.
We're ready to help you stay financially focused and ensure your life events adequately benefit you and your designated beneficiaries. Contact me at 216-831-0733 or info@zinnerco.com for a no cost, no obligation consultation. Together with the rest of the Zinner team of financial and business advisors, we can help you plan for a worry-free future.