Q: My husband turned 70 ½ years old on March 7th of this year, but unexpectedly died in June. I understand that IRS rules would have required him to take a required minimum distribution from his retirement accounts this year. I am the sole beneficiary of his IRA, but I am only 57 years old. Do I need still need to start taking RMD’s this year on the inherited IRA?
A: Because your husband died after he turned 70 ½, the IRS requires a minimum distribution from his retirement accounts. You should check with your husband’s IRA custodian to see if he took any distributions in 2017. If he did, those distributions count toward satisfying his RMD obligation. If he did not, you will need to take his required minimum distribution before December 31, 2017. Note this is different than the standard deadline for first-time RMD’s.
Because you are more than 10 years younger than your husband, you have the benefit of calculating the RMD using the IRS Joint Life and Last Survivor Expectancy Table. Given your age difference, using this table will result in a RMD that is about 7 percent lower than it would be using the standard Uniform Life Expectancy table. You can find copies of these tables by searching for them on www.irs.gov.
Whether you need to continue taking annual required minimum distributions depends on how you elect to receive the IRA. As an inheriting spouse you have two options. You can either treat your deceased husband’s IRA as a “Spousal Inherited IRA" or you can roll it into your own IRA.
If you roll it into your own IRA, it will be treated as if you created the IRA and there will be no further RMD until you turn 70 ½. This is the simplest option and will provide you the greatest tax benefit. However, it will also prevent you from accessing the funds before age 59 ½ without paying a 10% early distribution penalty.
If you think you will need to withdraw funds, the Spousal Inherited IRA option may be better for you. However, with a Spousal Inherited IRA you will be required to take required minimum distributions each year. The calculation of the RMD is beyond the scope of this column, but I’m happy to share it with you, if you send me an email. There are also a number of good calculators online.
As you think about how you want to receive your husband’s IRA, you may also want to consider the impact your decision will have on the next generation. For example, if you roll it into your IRA, your beneficiaries will be able to “stretch” their distributions over their lifetimes. However, if you elect to receive it as a Spousal Inherited IRA, your beneficiaries will be required to take their distributions based on the (shorter) life expectancy you were using.
But don’t worry. There is no rush to make your decision. If you elect to receive it as a Spousal Inherited IRA now, you can always roll it into your own IRA later.
Steven C. MerrellMBA, 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, CA93940 or email them to firstname.lastname@example.org.