Federal Employees News Digest

Informed Investor: Dec. 31 is MRD deadline for inherited IRA asset owners - Part II

This is the second of two columns discussing the minimum required distribution (MRD) rules for beneficiaries of traditional and Roth IRAs. The first column discussed the rules for non-spousal beneficiaries such as children. This column discusses the MRD rules for multiple beneficiaries and spousal beneficiaries of inherited IRAs.

Inherited IRA: Multiple Beneficiaries

If multiple beneficiaries inherit an IRA, then each beneficiary is treated as a non-spousal beneficiary. But each beneficiary is required to use the life expectancy of the oldest beneficiary when calculating MRDs. This is not good, as it means less opportunity for the younger beneficiaries to “stretch out” their portion of the inherited IRA over their longer life expectancies.

A suggestion for multiple beneficiaries of an inherited IRA is for the beneficiaries to split the IRA into separate inherited IRAs, to be done no later than December 31st following the year of the original IRA owner’s death. In so doing, each beneficiary gets to treat his or her inherited portion of the IRA as if he or she were the sole beneficiary of the inherited IRA. This is a good strategy because: (1) A spousal beneficiary will be treated as a “spousal” beneficiary rather than a non-spousal beneficiary thereby allowing for more distribution options for the spousal beneficiary; and (2) Each non-spousal beneficiary will get to use his or her own life expectancy for calculating MRDs. The following example illustrates:

Joseph was married to Helen (age 63) when he died in 2015 at the age of 65. Joseph and Helen have three children – Robert (age 38); Margaret (age 35); and Victor (age 30). At the time of his death, Joseph owned a traditional IRA worth $200,000 in which he named as equal beneficiaries – 25 percent to each - Helen, Robert, Margaret and Victor.  If Helen, Robert, Margaret and Victor decide not to split the inherited IRA into four inherited IRAs, then while each beneficiary can receive his or her inherited portion paid out over a life expectancy, they must use Helen’s life expectancy. According to the Single Life Expectancy Table in IRS Publication 590-B, Helen (age 63) has a life expectancy of 22.7 years. Starting in 2016, each beneficiary must receive a payment equal to the inherited IRA account balance as of 12/31/2015 divided by 22.7. For example, if the account balance was $50,100, then for 2016 each beneficiary will receive a distribution equal to $50,100 divided by 22.7, or $2,207.64.

On the other hand, if the IRA was split into four inherited IRAs, then: (1) Helen can take her inherited portion and roll it over into her IRA, and not withdraw funds until she is age 70.5; (2) Robert will receive his inherited IRA over his life expectancy of 45.6 years; (3) Margaret will receive her inherited IRA over her of life expectancy of 48.5 years; and (4) Victor will receive his inherited IRA over his life expectancy of 53.3 years.    

To split an inherited IRA into separate inherited IRAs, the executor of the deceased IRA owner’s estate should: (1) Create a separate account for each beneficiary, titled to include both the name of the deceased owner and the beneficiary; (2) change the Social Security number on each account to be that of the applicable beneficiary; and (3) use direct, trustee-to-trustee transfers to move the assets from the original IRA to each of the separate inherited IRA account.  

Inherited IRA: Spousal Beneficiary

A spousal beneficiary has two options as to what can be done with an inherited IRA from a deceased spouse, namely: (1) Do a spousal rollover, rolling over the IRA into his or her own IRA (traditional or Roth); or    (2) Continue to own the account as an inherited IRA beneficiary.

There is no deadline for a spousal rollover. A spouse has the option of owning the deceased spouse’s IRA as a beneficiary for several years and then electing to do a spousal rollover.

A spouse who continues to own the account as a beneficiary will be subject to the same IRA rules as the deceased spouse but with two exceptions:

  •  No 10 percent early withdrawal penalty. A spousal beneficiary can make withdrawals from the inherited IRA without being subject to the 10 percent early withdrawal penalty. This is regardless of the surviving spouse’s age. But if the surviving spouse younger than age 59.5 rolls over the inherited IRA into his or her IRA, then withdrawals are subject to a 10 percent early withdrawal penalty. This is a good reason for a surviving spouse to not perform a rollover into his or her IRA. Once the surviving spouse reaches age 59.5, he or she can rollover the inherited money and withdraw the IRA funds with no penalty.
  • Withdrawals from an inherited Roth IRA. If the inherited account was a Roth IRA, any withdrawal of earnings taken prior to the point at which the deceased spouse would have satisfied the five year rule will be subject to income tax, but not the 10 percent early withdrawal penalty.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. 

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Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

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