Thoughts on Inherited IRA Withdrawals

[pb4uski]

^^^ If your spouse inherited your IRA and adopts it as their IRA and later dies the beneficiaries have 10 years from the second death, not the first.

 

[TheWizard]

^^^ If your spouse inherited your IRA and adopts it as their IRA and later dies the beneficiaries have 10 years from the second death, not the first.

Right.
And this is why it's sometimes a good idea for the first spouse to pass to leave maybe 50% of their tax-deferred money to the ultimate beneficiaries rather than 100% to surviving spouse.
If this way, the ultimate beneficiaries get up to twenty years to withdraw the combined tax-deferred funds from the spouses...

 

[CRLLS]

Delaying the full 10, or even 20 years if you can manage that, has its own unknown variables. One downside to any of these 10-year periods is that unless you take out more than the minimum required annually, the amount to withdraw at the end of each 10-year period could easily be greater than the original IRA amount. the percentage depends on the age that each yearly RMD is using.

For example, I assume the 1st is inherited at age 73 and requires an RMD that 1st year. The average return of the SP500 is about 10% at the end of the 1st 10 year period, the beneficiary would still have to close out the IRA with a total of around 60% more than it started with. The annual RMD does not reach 10% until age 94 at which time RMDs would exceed the average SP500 return.


I suggest everyone to do some detailed ciphering to figure out what is best for their own situation. Calculating with fuzzy numbers usually result in fuzzy answers.

 

[pb4uski]

Right.
And this is why it's sometimes a good idea for the first spouse to pass to leave maybe 50% of their tax-deferred money to the ultimate beneficiaries rather than 100% to surviving spouse.
If this way, the ultimate beneficiaries get up to twenty years to withdraw the combined tax-deferred funds from the spouses...

Interesting idea... food for thought.

 

[USGrant1962]

Interesting idea... food for thought.

Yes, our two kids are beneficiaries for 15% or 20% each of our respective tax deferred accounts. 15% each of my larger 401(k), 20% each of DW's smaller tIRA.

 

[Sunset]

.......

This is from NerdWallet, and until we can meet with our CPA, this will serve as guidance --

Inherited IRA rules for spouses
If you're the sole beneficiary of your spouse’s IRA, you can take over the account (also known as a spousal transfer or “assuming” the IRA), and the IRS will treat it as though it has been yours all along. This means that you can continue to make contributions to the inherited IRA, and the schedule for required minimum distributions is reset so that it’s based on your own life expectancy.

.....
And this is why it's sometimes a good idea for the first spouse to pass to leave maybe 50% of their tax-deferred money to the ultimate beneficiaries rather than 100% to surviving spouse.
If this way, the ultimate beneficiaries get up to twenty years to withdraw the combined tax-deferred funds from the spouses...

IF that nerdwallet point of sole beneficiary is true.
Then one would have to make sure their IRA was split into 2 separate ones.

 

[USGrant1962]

IF that nerdwallet point of sole beneficiary is true.
Then one would have to make sure their IRA was split into 2 separate ones.

Hmm. Vanguards says in its guide to spousal inherited IRAs:

I’m one of several beneficiaries
You’ll be required to inherit the IRA (assuming an IRA is only available to spouses named as the sole beneficiary). But, after you inherit the IRA, you can choose to assume it later.

 

[pb4uski]

IF that nerdwallet point of sole beneficiary is true.
Then one would have to make sure their IRA was split into 2 separate ones.

I wouldn't think so... if the beneficiary is a spouse then they can elect to assume but a non-spouse doesn't have that choice... no need for more than one IRA.

 

[Sunset]

I've looked for clarification and it does seem in multiple locations the irs.gov site does specify the importance of sole beneficiary of an IRA.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

The spouse of the account owner has more options than non-spouse beneficiaries, if they're the sole beneficiary. Determination of whether the spouse is the sole beneficiary is made by September 30 of the year following the year of the account holder's death.

Then found in an irs.gov letter ruling:

https://www.irs.gov/pub/irs-wd/202348009.pdf

"Section 1.408-8 of the Income Tax Regulations, Question and Answer 5, provides that a
surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a
beneficiary in an individual’s IRA as the spouse’s own IRA. In order to make this
election, the spouse must be the sole beneficiary of the IRA and have an unlimited right
to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this
requirement is not satisfied even if the spouse is the sole beneficiary of the trust"

This ruling letter basically says if anyone else is beneficiary, then the spouse is not sole beneficiary.

If I was really keen on the importance of this, splitting the IRA into separate IRA's would ensure no issues, by defining spouse as beneficiary of the ones for the spouse, and other beneficiaries for the other IRA.

 

[pb4uski]

Interesting... learn something new every day.

 

[USGrant1962]

It looks like the sole beneficiary issue is a distinction without a difference for spouses of similar age. You will have two accounts instead of one, which is kind of a pain, but a spouse is not subject to the 10-year rule. Spouse has the option of starting life-expectancy RMDs right away or deferring RMDs until decedent's RMD date.

And, as Vanguard indicated in my post above, Publication 590-b says when "Inherited from spouse":

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution isn't a required distribution, even if you aren't the sole beneficiary of your deceased spouse's IRA.

So apparently as a spouse you can roll over the whole inherited IRA into spouses IRA. I think the sole beneficiary thing is driven by the account logistics. The account administrator (Vanguard, Fido, etc.) can either:

• Rename the whole account aka assume the account (sole beneficiary case)
• Split up the account into a number of new inherited IRA accounts (multiple beneficiaries)

Assuming part of it and creating new IIRA accounts with other parts is not allowed.

That's the only logic I can come up with for the sole beneficiary wording. But then again I said logic while talking about regulations so I'm probably wrong.