Q: When my uncle passed away in spring of 2022, he left me half of his large IRA. I thought the IRA was supposed to deplete within 10 years of my uncle’s death, but someone recently told me I’m still eligible for a stretch IRA, since my uncle was only a few years older than me. But doesn’t the IRS levy penalties for not taking required distributions? Can you please help me figure this out?
A: Since the SECURE Act became law in 2020, a lot of confusion has surrounded required minimum distributions (RMDs) from inherited IRAs and other retirement accounts. That confusion only increased when SECURE Act 2.0 was passed on December 29, 2022. There has actually been so much confusion that the IRS suspended RMDs for the past three years for IRAs inherited after January 2020. That pause will end in 2024, but it gives a sense of how confusing RMD rules have been.
Given that your uncle was only a few years older than you, you are part of a very narrow group of IRA beneficiaries called “eligible designated beneficiaries.” The SECURE act defines an eligible designated beneficiary as a surviving spouse, minor children of the decedent (until they reach the age of majority), chronically ill and disabled individuals, and those less than ten years younger than the decedent. As an eligible designated beneficiary, you have three options for withdrawing money from your uncle’s IRA: withdrawing it all in a lump sum, withdrawing it over ten years, or stretching your withdrawals over your life expectancy. From a tax management perspective, you probably want to give the third option a close look. Your adviser can help you figure out what’s best for your situation.
Q: My wife recently died, and I’m trying to figure out what to do with the IRA she left me. What are spousal rules for inheriting IRAs?
A: Surviving spouses have several options for inheriting IRAs, but they can get complicated. You’ll want to find a competent financial adviser to help you figure out which options are best for your particular situation. But here’s a basic overview of key points to consider.
You can simply leave the IRA in your deceased spouse’s name and treat it as an inherited IRA. If she died before beginning her RMDs, you can take distributions gradually over your lifetime. Those distributions must begin by December 31 of the year your wife would have reached 73, or December 31 of the year immediately following her death—whichever is later. If she died after beginning her RMDs, you can take distributions over her remaining life expectancy, or yours, whichever is longer.
You can roll your wife’s IRA into your IRA. For most surviving spouses, this is probably the best option. It allows you to contribute additional funds to the IRA and defer any withdrawals until you turn 73, even if your deceased spouse already started taking her RMDs.
However, SECURE Act 2.0 allows surviving spouses a third option: you can be treated as the original deceased employee with respect to distribution rules. This option has three powerful benefits:
- You can defer any RMDs until your wife would have been required to take them.
- RMDs are calculated from the Uniform Life Table instead of the Single Lifetime Table. This has some real advantages. Not only does the Uniform Life Table start with a lower RMD (only about 62% of the Single Lifetime RMD), but the RMD for the Uniform Life Table grows more slowly over time. This effectively stretches withdrawals even further.
- If you were to die before starting to take RMDs, your beneficiaries can spread distributions over their lifetimes—effectively stretching the inherited IRA and avoiding the ten-year rule.
An important caveat applies to younger surviving spouses. If you roll your spouse’s IRA into your own IRA, you will be hit with a 10% penalty if you take distributions prior to turning 59½. If you think you’ll need those funds sooner, consider leaving the assets in the name of your deceased spouse and treating it as an inherited IRA. This will let you withdraw assets without the early withdrawal penalty. When you reach the age of 59½, you can then roll over your deceased spouse’s IRA into your own, enjoying the benefits of stretching RMDs over your lifetime. The IRS imposes no time limit for rolling your deceased spouse’s IRA into your own.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.