February 2021

Handling IRA Beneficiary Situations

The SECURE Act brought new beneficiary RMD rules. Most nonspouse beneficiaries of IRA owners dying in 2020 and subsequent years will be required to close the inherited IRA by using the 10-year rule. The new beneficiary RMD rules in general do not impact spouse beneficiaries. A spouse beneficiary who is the sole primary beneficiary can still elect to treat their deceased spouse’s IRA own. If a spouse beneficiary is not the sole beneficiary he or she may take a distribution and then make a rollover contribution as long as the standard rollover rules are met.

Set forth are two articles on administering inherited IRAs– one for surviving spouses and one for nonspouse beneficiaries.

Each IRA beneficiary after consulting with their tax adviser has the primary responsibility to comply with the beneficiary RMD rules.

An IRA custodian’s personnel will want to in many cases double check their beneficiary situation with their IRA consulting firm.

A Married IRA Owner Dies and the Surviving Spouse Elects to Treat the Decedent’s IRA as His or Her Own IRA
A surviving spouse over age 591/2 will almost always want to elect to treat their deceased spouse’s IRA as their own. This eases the administration for both the surviving spouse and for the IRA custodian. Why have two IRAs when a person can have one?

How is this election made?
It is easy. Form 57 (IRA Distribution Form) is completed. The accountholder information is completed with the name of the deceased IRA spouse. The beneficiary information is completed with name of the surviving spouse. Under the reason for withdrawal/distribution section, select #12, Transfer to the Accountholder’s spouse due to election to Treat as Own.

Completion of Form 57 authorizes the withdrawal of the funds from the decedent’s IRA. Because this withdrawal is a transfer it is not to be reported on the Form 1099-R. We at CWF get the idea that some representatives of core vendors advise bank personnel that a Form 1099-R needs to be prepared for the decedent and the reason code “4” for death is to be used rather than a transfer code. This is wrong. These funds were not withdrawn by the IRA accountholder prior to his or her death.

Transferring the Funds into the IRA of the Surviving Spouse. The transferred funds can go into an existing IRA for the surviving spouse or a new one. The IRA plan agreement form and/or the IRA contribution form will have a selection similar to, Transfer - Surviving Spouse Elects to Treat as Own.

CWF Form 204, Beneficiary’s Distribution Notice and Certification Form. This form explains the RMD rules applying to a spouse beneficiary and other eligible designated beneficiaries. The most conservative administrative approach is to furnish this form to a spouse beneficiary. However, if the surviving spouse has already concluded that she or he wishes to treat their deceased spouse’s IRA as their own, then an IRA custodian may decide to keep thing simple and not furnish Form 204 or a similar form.

RMDs for the year of the death. A surviving spouse beneficiary must withdraw the RMD as calculated for their deceased spouse to the extent it had not been distributed to that spouse. However, it is not required that the withdrawal take place prior to transferring the decedent’s entire account balance into the surviving spouse’s IRA. The decedent’s entire IRA balance is to be transferred into the surviving spouse’s IRA and then the surviving spouse must withdraw both RMD amounts. These can be combined into one amount. For Form 1099-R purposes, the reason code is a “7” and not a “4” because the surviving spouse treated the decedent’s IRA as their own IRA.

An IRA Owner Dies With a Nonspouse Beneficiary
An IRA custodian is now having to administer inherited IRAs for nonspouse beneficiaries under the new RMD beneficiary rules.

The first determination to be made by both the I RA custodian and the non spouse beneficiary is, is the beneficiary an EDB or a non-EDB.
Most beneficiaries will not be an EDB. A non-EDB who is a person must in general use the 10-year rule to close the inherited IRA A non-EDB of an IRA owner who dies in 2021 must close the inherited IRA by December 31, 2031. A non-EDB who is not a person in general must use the 5-year rule. However, see the article on page 4 discussing whether a qualified trust is also eligible to use the 10-year rule.

We at CWF have created two beneficiary administrative forms. Form 204 is to be used when a beneficiary is an EDB. Form 206 for when a beneficiary is not an EDB. In general, the 10-year rule applies to a non-EDB. The beneficiary may use Form 206 to inform an IRA custodian how and when distributions will be taken from the inherited so that it will be closed by the applicable deadline. A non-EDB may establish a periodic distribution schedule, but is not required to do so. The beneficiary may take nonperiodic distributions. Note that the beneficiary does not have a specific RMD for years 1-9, but will have an RMD for the 10th year when the inherited IRA must be closed.

What about any RMD for the year the IRA owner died? To the extent any RMD was not withdrawn by the decedent, the non-EDB must withdraw such RMD by December 31.
A nonspouse beneficiary must remember that the law expressly provides that he or she cannot take a distribution and then rollover such funds into another inherited IRA or a personal IRA. The inherited IRA of a nonspouse beneficiary may be transferred as long as both IRA custodians agree to the transfer.

For Form 1099-R purposes, the reason code is always a “4” because the withdrawal is from an inherited IRA (traditional, SEP or SIMPLE).