Special Treatment for an Older Spouse/Beneficiary of an IRA

Note: the situation described in this post was originally brought to my attention by Mr. Barry Picker, of Picker, Weinberg, & Auerback, CPAs, P.C.  Mr. Picker is another of those “rock stars” in the world of retirement plan knowledge, up there with the best of them.  Many thanks to Mr. Picker for sharing his wealth of knowledge.

There is a special set of circumstances regarding inherited IRAs that only fits a few cases – but for those cases the rules can work out favorably and it is important to understand how this operates.  The circumstances are that a younger spouse has died and left an IRA to the older, surviving spouse.  In this case, if the decedent-spouse had already begun receiving Required Minimum Distributions (RMDs) from the IRA, the survivor-spouse, if sole beneficiary of the IRA, can make the distribution rules work in his or her favor.

In any case, when the decedent-spouse was already receiving RMDs from the account, the survivor-spouse has two options:

1. continue receiving the RMDs from the account based upon the decedent’s life; or
2. rollover (or retitle) the IRA as his or her own IRA, and then start RMDs based upon his or her own life.

In the second option, if the surviving spouse is younger than 70½ he or she can delay the start of RMDs until he or she reaches 70½.  This may be an attractive option to pursue if the surviving spouse wishes to defer the IRA distributions as long as possible.

However, in a case where the surviving spouse is older than the decedent, delay of RMDs is not an option.  In addition, it should be noted that the two options listed above, while exclusive of one another (can’t both be employed at once), they could be employed one after another, only in the order of option 1 first and option 2 second.

The reason that a surviving spouse would want to do this is to stretch the IRA as long as possible.  By taking Option 1, he or she can use the longer lifetime of the decedent, BUT: when calculating RMD for an inherited IRA, the divisor factor is only chosen from the IRS Table I once.  Each and every subsequent year, the divisor factor is reduced by subtracting 1.

On the other hand, when using Option 2, every year the RMD divisor factor is taken from Table I, based upon the IRA owner’s attained age in that year.  At some point in the future, the RMD divisor factor for Option 1 becomes less than the RMD divisor factor for Option 2 – which would mean that Option 2 (at that point) would result in a smaller RMD amount for that year and each subsequent year.

Example

Here’s an example: An IRA worth $300,000 is inherited by Jane, age 77, from John, who was 74 at the time of his death.  Jane has the options listed above – leave the IRA in John’s name and continue receiving RMDs based upon his life, or retitle (or rollover) the IRA to her own name and start RMDs based upon her life.

The divisor factor for RMDs for the first year after John’s death, based on John’s life (from Table I) is 13.4.  At the same time, the divisor factor based on Jane’s life for that year is 11.4.  So for the first year after John’s death, the smallest RMD is calculated by using John’s life.  Below are the factors for each year thereafter:

As you can see, in Year 6 after John’s death, the divisor based on Jane’s life becomes larger than the divisor based on John’s life, due to the way the year-over-year calculations are done.  At this point, it will become advantageous for Jane to rollover the IRA (or retitle it) to an IRA in her own name, and then continue the RMDs based upon her own life.  This will stretch the IRA distributions out for a longer period of time.

So by taking Option 1 first and then taking Option 2 later, Jane can stretch out the IRA distributions as far as possible.  If she stays on John’s schedule, the entire IRA would have to be distributed by the end of the 14th year after his death.  Switching over to her own distribution schedule after the 6th year (when it becomes advantageous to do so), the IRA distribution can be stretched out over her entire lifetime, potentially as much as 23 years after John’s death.

As I mentioned at the outset, this situation won’t fit too many folks, or benefit very many, but it could be useful for specific situations.