May 2022

The IRS has Proposed Cut-backs for the Special RMD Rules for Surviving Spouse Beneficiaries

This article discusses and explains the IRS proposals to change the rules for certain spouse beneficiaries. The IRS believes the current rules provide too many tax planning benefits to some surviving spouse beneficiaries and so the IRS wants to reduce or limits those benefits. Congress in enacting the SECURE Act did not indicate that any of the laws and rules applying to spouse beneficiaries should be changed.

The proposed new restrictions are complex, but apparently believes the additional revenue to be generated is sufficient to justify the additional complexity.

There are special RMD rules for certain spouse beneficiaries. There is one set of rules if the deceased spouse died before their required beginning date and a second set of rules if the deceased spouse died on or after their required beginning date.

An RMD is never eligible to be Rolled Over. This rule applies to everyone. There was a limited exception for certain COVID-19 situations.

A non-spouse beneficiary with one exception is never eligible to rollover any distribution from an inherited IRA. A spouse beneficiary is eligible to rollover a distribution from an inherited IRA. Certain spouse beneficiaries have the right to treat their deceased spouse’s IRA as their own. This election is equivalent to a non-reportable transfer. IRA RMDs can be transferred. They cannot be rolled over.

It Must Be Determined Which RMD spouse beneficiary Rule Applies. These rules are complicated.

The Surviving Spouse’s Right to Elect As Own.

A surviving spouse who is the sole primary beneficiary has the right to elect to treat the deceased spouse’s IRA as his or her own. Under the pre-2020 rules the surviving spouse could make the election at any time. This was/is true even if the spouse had initially elected the 5/10-year rule or the life distribution rule. A spouse beneficiary who is sole beneficiary has the right to treat their deceased spouse’s IRA as his or her regardless of whether the deceased spouse died before or on/after their required beginning date.

The IRS has proposed there will now be a deadline to make the election. And if the election is not made by the deadline, the surviving spouse no longer has the right to treat the deceased spouse’s IRA as their own. The surviving spouse can still take a distribution and make a rollover contribution.

The treat as own deadline. The election must be made by the later of December 31 of the year the surviving spouse beneficiary attains age 72 or December 31 of the year following the year the IRA owner dies. The following charts covers some situations:

Note, the shortest election period for a surviving spouse will be December 31 of the year following the year their spouse died. The election period will be longer when either the deceased IRA owner or the beneficiary are younger than age 72.

Once the surviving spouse elects as own the standard IRA rules apply to the surviving spouse including the RMD rules. The RMD which was calculated for the year the IRA owner dies must be withdrawn by the surviving spouse to the extent it had not been distributed prior to the deceased spouse’s death.

Note, that the election cannot be made if a trust has been named as the IRA beneficiary even if a spouse is the sole beneficiary of the trust.

Rules Applying When The IRA Owner Spouse died before their required beginning date.

RMD Spouse Beneficiary Rule #1
If the 5-year rule applies to a spouse beneficiary and the IRA owner has died before their required beginning date, there is no RMD for years 1-4, but there is an RMD for year 5. The spouse beneficiary may rollover any distribution which occurs in years 1-4. Any distribution prior to the 5th year is eligible to be rolled over as long as there is compliance with the standard rollover rules. Any distribution during the 5th year is ineligible to be rolled over because the entire amount is an RMD because the inherited IRA must be closed by December 31 of the 5th year.

RMD Spouse Beneficiary Rule #1A
If the 5-year rule applies to a spouse beneficiary and the IRA owner has died before their required beginning date, then in some situations the surviving spouse will have a hypothetical RMD which is ineligible to be rolled over. Any IRA balance in excess of the hypothetical is eligible to be rolled over. This is discussed below.

RMD Spouse Beneficiary Rule #2
If the 10-year rule applies to a spouse beneficiary and the IRA owner has died before their required beginning date, there is no RMD for years 1-9, but there is an RMD for year 10.

The spouse beneficiary may rollover any distribution which occurs in years 1-9. Any distribution prior to the 10th year is eligible to be rolled over as long as there is compliance with the standard rollover rules. Any distribution during the10th year is ineligible to be rolled over because the entire amount is an RMD because the inherited IRA must be closed by December 31 of the 10th year.

RMD Beneficiary Rule #2A
If the 10-year rule applies to a spouse beneficiary and the IRA owner has died before their required beginning date, then in some situations the surviving spouse will have a hypothetical RMD which is ineligible to be rolled over. Any IRA balance in excess of the hypothetical is eligible to be rolled over. This is discussed below.

RMD Beneficiary Rule #3
If the life expectancy rule applies to a spouse beneficiary who is the sole beneficiary and the IRA owner has died before their required beginning date, then the spouse is able to defer starting annual distributions over his or her life expectancy by 12/31 of the year The deceased spouse would have attained age 72. There is a special life distribution rule which is used. The divisor is to be recalculated each year using the current age of the surviving spouse.
In this situation also surviving spouse will have a hypothetical RMD which is ineligible to be rolled over. Any IRA balance in excess of the hypothetical is eligible to be rolled over. This is discussed below.

RMD Beneficiary Rule #3A
If the life expectancy rule applies to a spouse beneficiary who is not the sole beneficiary and the IRA owner has died before their required beginning date, then the spouse must commence annual distributions over his or her life expectancy by 12/31 of the year following the year the IRA owner died. The standard life distribution rule is used to calculate that RMD amount. There is no hypothetical RMD because there is an actual RMD.

Discussion of Hypothetical RMDs
There is a special rule for a spouse beneficiary of an IRA owner who died before their required beginning date and the spouse beneficiary is using either the 5-year rule or the 10-year rule.

Why this special rule? An older surviving spouse beneficiary often will elect the 5-year rule or the 10-year rule rather than treating the IRA as their own because they can defer distributions whereas if they elect as own they will be required to commence immediate distributions.

In some situations, there is to be a hypothetical RMD which is ineligible to be rolled over. That is, there is an exception to general rule that distributions occurring to a spouse beneficiary in years 1-4 or 1-9 are eligible to be 100% rolled over.

There will be a hypothetical RMD only if the distribution is made to the surviving spouse in the calendar year after the year the surviving spouse attains age 72 and the rollover is made into the spouse’s IRA and not an inherited IRA.

Note this special hypothetical RMD rule coordinates with the rule where a surviving spouse elects to treat the deceased spouse’s IRA as his or own IRA.

What portion of such a distribution is ineligible to be rolled over?
The spouse beneficiary is considered to have a hypothetical RMD for his or her first applicable year and then for subsequent years. The first applicable year is - the later of the calendar year in which the surviving spouse attains age 72 or the calendar year in which the deceased IRA owner would have attained age 72.

The RMD for year 1 is - the calculated RMD using the standard life distribution method less any actual distributions during year 1.

The RMD for year 2 is - the sum of the calculated RMDs for year 1 and 2 less any actual distributions for years 1 and 2. However, there is an adjustment to the standard life distribution rule.

Example #1. Jane Doe died in 2021 at age 67. Her spouse (Bob) who was age 68 in 2021 elected to use the 10-year rule. Bob is not required to commence distribution by December 31, 2025 the year Bob would have attained age 72. Bob in 2026 (5 years later) wants to roll these funds into his own IRA. He is unable to rollover the entire balance. He must calculate his hypothetical RMDs, if any, for 2022, 2023, 2024 2025, and 2026. He cannot rollover his hypothetical RMD amount.

Note that Bob attains age 72 in 2025. So, his first applicable year is 2026. If he takes a distribution in years 2022-2025 he is eligible to rollover the full amount because there is no portion which is a hypothetical RMD. The hypothetical RMDs start with the year after the year Bob attains age 72. This is 2026. He is deemed to have a hypothetical RMD for 2026 and 2027. There is no hypothetical RMD for years 2022-2025 because his hypothetical RMDs commence the year after he attains age 72.

Example #2. Jake Doe died in 2022 at age 66 or he would have attained age 66 in 2022. His spouse (Barb) is his sole primary beneficiary and she attains age 65 in 2022. Barb elects to use the 10-year rule.

She is planning to take a distribution in 2031.
It is assumed the inherited IRA has a balance of $100,000 as of December 31, 2028.
It is assumed the inherited IRA has a balance of $96,000 as of December 31, 2029.
It is assumed the inherited IRA has a balance of $92,000 as of December 31, 2030.

What portion of this inherited IRA in 2022 is ineligible to be rolled over because it would be her hypothetical RMD amount?
Barb has or will reach age 74 in 2031. Jake would have reached age 75 in 2031.

Barb must calculate her hypothetical RMDs for 2029, 2030 and 2031. She attains age 72 in 2029.
Her hypothetical RMD for 2029 is $5813.95 ($100,000/17.2).
Her hypothetical RMD for 2030 is $5853.66 ($96,000/16.4).
Her hypothetical RMD for 2031 is $5897.44 ($92,000/15.6).

Her total hypothetical RMD amount $17,565.05. She is ineligible to rollover that amount.
Rules Applying to a Spouse Beneficiary When IRA Owner Dies on or after their required beginning date

There are two different life distribution rules.
First, if the spouse is the sole beneficiary, then the divisor will be determined by using the special recalculation method. This means each year the divisor is determined by using the spouse’s age for that year and using the applicable factor from the Single Life Table.

Second, if the spouse is not the sole beneficiary, then the standard RMD formula will be used. The initial divisor will be determined for the first year after the year the IRA owner died by using the applicable factor from the Single Life Table by using the spouse’s age. The reduce by one method will be used for subsequent years.

There is a good possibility that an additional a special life distribution rule would be used. When the deceased IRA owner is younger than the surviving spouse, then in that situation the RMD calculation uses the age of the deceased IRA owner rather than the older surviving spouse beneficiary.

Deadline to Close Any Inherited IRA
The applicable deadline is the earliest of the following dates
1. December 31 of the 10th year following the year the IRA owner died - applies to a beneficiary who is a person and who is not an EDB;
2. December 31 of the 10th year following the year the IRA beneficiary died as long as the beneficiary was an EDB as of the date of the IRA owner’s death.
3. December 31 of the 10th year following the year the IRA beneficiary who is a minor attains age 21 as long as the child is not age 21 as of the date of the IRA owner’s death.
4. December 31 of the year in which the divisor for an EDB would have been less than or equal to one. Note that this deadline applies even if the EDB is older than the deceased IRA owner. This is an exception to the exception. For example the IRS owner dies at age 75 in 2022. His beneficiary is age 80. The annual RMD for the beneficiary will be determined using the age of the deceased IRA owner who is younger. The initial divisor would be 14.8 and not 11.2. The standard formula is used until the year it is required to be closed which is 12/31 of the 11th year.

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