A surviving spouse who is the sole beneficiary of the balance remaining in their deceased spouse's traditional IRA may leave the account as it is, or roll over the decedent's IRA into their own IRA, or elect to treat the IRA as their own for all purposes, including the rules of IRC §72(t) as to the imposition of a 10 percent penalty tax if the amount in the IRA is withdrawn before age 59-1/2.Whether a rollover to the surviving spouse's own IRA or an election to treat the deceased spouse's IRA as their own should be made depends mainly on the surviving spouse's age.
Survivor is at least 59-1/2
For the following reasons, a surviving-spouse beneficiary of an IRA who is at least 59-1/2 (but is not substantially older than the deceased spouse, see below) has much to gain and little to lose by making a rollover or electing to treat the deceased spouse's IRA as their own.
1. By making the rollover or election to treat the IRA as their own, the surviving spouse can name their own beneficiaries for the IRA, and thus give the IRA a longer lifespan. If the surviving spouse dies before the IRA is depleted, the balance will be paid over their beneficiary's life expectancy.
On the other hand, if the rollover or election isn't made, the balance remaining in the IRA when the surviving spouse dies will be paid over what remains of the surviving spouse's life expectancy.
2. After the rollover or election, the IRA is treated as if the surviving spouse had funded it. This means that the surviving spouse can compute required minimum distributions using the Uniform Lifetime Table.
Under this table, required minimum distributions would have to be made based on the joint and last survivor life expectancy of the IRA owner and a beneficiary 10 years younger than the owner. This results in a longer life expectancy (and thus lower required minimum distributions) than if distributions had to be made under the Single Life Table that would have to be used if the rollover or election to treat the IRA as the surviving spouse's own had not been made.
3. With the rollover or election, the required beginning date for distributions is April 1 of the year following the year in which the surviving spouse attains age 70-1/2. If the IRA remains in the name of a decedent who died before the date that they were required to begin taking distributions from the IRA, and the IRA permits lifetime distributions to the beneficiary, minimum distributions must begin by the later of:
* Dec. 31 of the year following the year in which the decedent died; or,
* Dec. 31 of the year in which the decedent would have attained age 70-1/2 had they lived. Thus, a surviving spouse who is younger than the decedent can arrange for longer deferral by making the rollover or electing to treat the decedent's IRA as their own.
If the owner dies after they were required to begin taking required minimum distributions, then distributions must be made over the longer of:
* The remaining life expectancy of the surviving-spouse beneficiary, using their life expectancy for each distribution year; or,
* The remaining life expectancy of the IRA owner, using the owner's attained age in the year of death and subtracting one for each year that elapses after the year of death.
Example 1: Your client's wife died at age 65 on June 15, 2006, and he was the sole beneficiary of her traditional IRA. Thus, she died before she had to begin taking required minimum distributions. If she had lived, she would have been 70-1/2 in 2011 and 71 in 2012. Your client also will be 70-1/2 in 2011 and 71 in 2012.
If your client elects to treat his wife's IRA as his own, he will not have to start taking required minimum distributions until April 1 of 2012. Even though not made until 2012, the distribution will be treated as made for 2011 and will be based on the value of the IRA on Dec. 31, 2010.
Assume that the value on that date will be $300,000. Based on the Uniform Lifetime table, his required minimum distribution for 2011 will be $10,949 ($300,000 divided by 27.4, the distribution period for an individual age 70 in the year for which the distribution is made).
If your client does not roll over his wife's IRA into his own, or elect to treat his wife's IRA as his own, he also will have to start taking required minimum distributions by April 1, 2012, the year after the year in which his wife would have been 70-1/2 if she had lived. The amount of the distribution would also be based on the amount in the IRA on Dec. 31, 2010.
However, the amount of the distribution from the IRA will be based on the distribution period in the Single Life Table for an individual age 70 in 2011. This distribution period is 17.0. Thus, the amount of the required minimum distribution would be $17,647 ($300,000 divided by 17).
Survivor is under 59-1/2
If the surviving-spouse beneficiary is younger than age 59-1/2, the spousal rollover or election to treat the decedent's IRA as the surviving spouse's IRA could have a significant disadvantage. This is especially so if she is substantially younger than 59-1/2, and if there is a good chance that she will need to start taking funds out of the IRA before reaching that age. This is because if the rollover or election to treat the IRA as the surviving spouse's own IRA is made, pre-age-59-1/2 withdrawals from that IRA generally will be subject to the 10 percent penalty tax, on top of regular income taxes.
For example, in its recent decision in Gee (127 TC No. 1), the Tax Court found that a wife who rolled over her deceased husband's IRA into her own IRA and then took a distribution before age 59-1/2 had to pay a penalty tax of $97,800. This penalty could have been avoided if she had not rolled the IRA over into her own, and instead left the IRA in her husband's name, since pre-age-59-1/2 withdrawals from the decedent's IRAs are not subject to the penalty tax.
Observation: Pre-age-59-1/2 withdrawals from an IRA also can be made without having to pay the 10 percent penalty tax if they don't exceed qualified higher education expenses during the withdrawal year.
To the extent that the surviving spouse plans to use pre-age-59-1/2 distributions from the deceased spouse's IRA to pay for college expenses, there would be no disadvantage to rolling over the decedent's IRA into their own IRA.
A surviving-spouse beneficiary's election to treat the decedent's IRA as their own may be made any time after the account owner's death. Accordingly, a young surviving spouse who may need to take funds out of the IRA before attaining age 59-1/2 should keep the entire IRA balance in the decedent's name until they reach that age.
This way, any withdrawals from the IRA before that age will be penalty-tax-free. When the surviving spouse reaches age 59-1/2, they can roll over the IRA into an IRA in their own name, and thus get the benefits described above of treating the IRA as their own.
A much older survivor
If the surviving-spouse beneficiary is substantially older than the deceased IRA owner, then, for the following reasons, it may be difficult to choose between rolling over the IRA or electing to treat the IRA as the surviving spouse's own, and leaving the IRA in the deceased spouse's name.
1. Making the election will accelerate the required beginning date for distributions.
Example 2: Your client is 76 in 2006. His wife, who died earlier in 2006, was 61 in January of that year. If your client rolls the IRA over into his own, or elects to treat his wife's IRA as his own, he will have to take required minimum distributions immediately. If he leaves the IRA in his wife's name, he won't have to start taking distributions until April 1 of 2016, the year after she would have been 70-1/2.
2. If the deceased spouse's IRA is not rolled over or the surviving spouse does not elect to treat it as their own, then the surviving spouse won't be able to name their own beneficiaries for the IRA, and thereby defer taking distributions after their death over the beneficiary's Single Life Table life expectancy.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
