IRA Beneficiaries
Hello –
Prior to The Secure Act, it made sense for a spouse who inherited a retirement plan to roll-it over into his/her own name in most cases (especially if that spouse had no anticipated needs for the monies if <59 1/2) in order to be able to name successor beneficiaries who would then be able to spread the lifetime RMD over their life expectancy.
Given The Secure Act and anyone not an eligible designated beneficiary needing to withdraw the funds by the end of the 10th year after death, if a husband were to pass, leaving his retirement account to his wife (whether a 401k, IRA, other type of qualified retirement plan, etc.), is there any necessity to roll the funds over to the spouse’s name since, whether the funds remain as an Inherited IRA by the spouse or are in the spouse’s own name, their children (assume not disabled or chronically ill and not minors) would be subject to the 10-year payout rule?
I recognize remaining an Inherited beneficiary is preferable in the event the inheriting spouse is <59 1/2 to avoid a 10% penalty in the event the beneficiary needs access to the funds prior to turning 59 1/2.
Thank you!
Jason
Permalink Submitted by Alan - IRA critic on Mon, 2021-01-18 17:27
You are correct that in most cases, the next beneficiary is only getting 10 years either way. However, if the surviving spouse maintains the account as inherited, they will be subject to much larger (Table I) RMDs than if they elected ownership, and their successor beneficiary would then inherit a smaller IRA.
An EDB is determined upon death of the owner, therefore if there is a child that is at risk of disability later on, the child is an EDB if they inherit from an owner, and they cannot be an EDB if they inherit as a successor beneficiary.
As the IRS found several years ago in PLR 2004 50057 that a QRP’s surviving spouse could do a direct rollover to an inherited IRA, it is generally a good idea to do this to avoid the problems the successor beneficiary might face if they inherited a QRP. Surviving spouse can still elect ownership of that inherited IRA down the road when it becomes an advantage.
Permalink Submitted by Jason Hochstadt on Mon, 2021-01-18 20:36
Hi Alan – Thanks for the reply. Wouldn’t a benefit to keeping in the qualified plan bei the ability to do a Roth conversion if a Roth is a permitted money type (by the Inherited beneficiary)? Can a successor beneficiary do a Roth conversion inside an employer sponsored qualified retirement plan? No Roth conversions may be done w/in a Traditional IRA. Also, since there is the 10 years to withdraw now by a non-eligible designated beneficiary (e.g. healthy child), any reason the Inherited IRA needs to be set up by 12/31 of the year after death (whether one or multiple beneficiaries) – seeing the initial RMD is not due for 10 years (at the latest)? Thanks! Jason
Permalink Submitted by Alan - IRA critic on Mon, 2021-01-18 22:37
A designated beneficiary can do a direct rollover to an inherited IRA, but a successor beneficiary cannot. As for IRRs, only a spousal beneficiary can do an IRR if the plan permits it, a non spouse beneficiary and a successor beneficiary cannot (per Notice 2010-84, QA 14). Therefore, a spousal beneficiary is best advised to do a direct rollover to an inherited IRA or inherited Roth IRA so that the surviving spouse’s beneficiary is not left with only a lump sum distribution option.
The 10 year rule has also reduced the importance of establishing separate inherited IRA accounts by the end of the second year unless a beneficiary is an EDB.
Permalink Submitted by Jason Hochstadt on Tue, 2021-01-19 01:11
Hi Alan,1. You wrote that only a designated beneficiary can do a direct rolllover to an Inherited IRA but a successor beneficiary cannot. Can you clarify this? Wouldn’t the successor beneficiary be able to take the distributions out of an Inherited IRA over a 10 year period just as an initial beneficiary may (assuming healthy non-spouse)?2. On a related note, you wrote that a surviving spouse’s beneficiary may only elect a lump sum distribution. So, is the rule that (a) if a Spouse rolls into their own IRA and then leaves it to a child (adult and healthy), the child may take the distributions out by the end of year 10, whereas (b) if the Spouse stays as Inherited IRA beneficiary and then dies, whoever the initial participant (1st deceased spouse) would inherit (as the contingent beneficiary) AND (c) this individual (assume healthy non-spouse) must take a lump sum distribution – not able to withdraw over 10 years?Thanks! Jason
Permalink Submitted by Alan - IRA critic on Tue, 2021-01-19 03:38
That statement referred to an inherited QRP. The successor beneficiary of a QRP is not eligible for a direct rollover per Sec 402(c)(11), since they are not a designated beneficiary. While that successor could legally receive distributions over the remaining 10 year period of the designated beneficiary , in practice very few QRPs will offer that option. Rather they will issue a lump sum distribution to that successor beneficiary. That means the designated beneficiary should pursue the direct rollover to an inherited IRA where the lump sum distribution is avoided, even though there may not be many years left in the designated beneficairies 10 year rule.
The surviving spouse’s beneficiary will probably be given a short notice of a LSD being issued by the plan. There actually is no other option, since that NS beneficiary cannot roll the plan over to an IRA, so the question becomes when that beneficiary must receive the lump sum. Not a good option for tax purposes. The surviving spouse of a QRP can do a direct rollover to an inherited IRA and then roll that over, or more typically direct to their own IRA from the QRP. As you said when that surviving spouse passes with an owned IRA, most beneficiaries will be subject to the 10 year rule. Similarly if the surviving spouse passes with an inherited IRA, the non spouse beneficiary will likewise be subject to the 10 year rule as the beneficiary of an EDB. Am not following your reference to a contingent beneficiary. Is the contingent named by the original QRP owner or by the surviving spouse? Again, lump sum distributions not triggered by the end of the 10 year rule, are only typical of funds left in a QRP by the original designated beneficiary and is a plan requirement, not an IRS requirement.
Permalink Submitted by David Mertz on Tue, 2021-01-19 12:44
Contingent beneficiaries are no longer relevant if a primary beneficiary of the decedent for whom the account had been maintained is available (is alive or is a non-individual). Contingent beneficiaries only inherit if no primary beneficiary is alive (and there is no primary non-individual beneficiary) to be able inherit or if all primary beneficiaries disclaim. If a beneficiary inherits and then dies without establishing their own successor beneficiaries, the default successor beneficiary will be that beneficiary’s estate, generally resulting in a lump-sum distribution to that beneficiary’s estate; the original participant’s contingent beneficiaries do not apply.