Distributions at death before required beginning date

If your spouse died before attaining age 70 ½, and you are named as his beneficiary, you may elect to either roll your spouse’s interest to your own IRA or leave the plan intact. If you choose the rollover option, your RMDs are based on your age. Thus, if your late spouse was older than you, rolling over his account will allow you to postpone RMDs until your 70-½ year rather than his. If you decide not to roll over, you must begin taking distributions in the year your late spouse would have attained age 70 ½.

RMDs must be taken under one of the following two methods:

1. Under the “5-year rule” (nothing required to be distributed in the first four years following death, but the entire account must be distributed by December 31st of the fifth year after death); or
2. Annual distributions over your life expectancy (which is faster than the Uniform Table which calculates minimum distributions on the basis of the joint lives of two individuals 10 years apart in age).

If you choose to roll over, you will begin taking RMDs based on the Uniform Table. At your death, your new beneficiaries (for example, your children) may take the balance of your interest over their life expectancies. By contrast, if you do not roll over, any benefits remaining in your late spouse’s account at your death must be paid to the contingent beneficiaries named by your late spouse over your remaining life expectancy (which is likely to be substantially shorter than that of your beneficiaries).

Example: Jim, age 68 and Mary, age 62, are married with two children. Jim has an IRA worth $1,000,000. Jim dies. Mary can:

1. Rollover the entire account into her name. If she rolls over, she does not have to start RMDs until she reaches the age of 70 ½ and she can use the Uniform Table. After her death, the children can take the remaining balance over each of their life expectancies, not Mary’s
2. Not rollover the account. If the account is not rolled over, Mary must take the RMD the year Jim would have turned 70 ½. She must either take the entire account within 5 years, or over her life expectancy. Her life expectancy is figured on a table with shorter lives then the Uniform Table, which uses joint lives. Any balance remaining after Mary’s death must be paid out to the children over Mary’s life expectancy, not the children’s.

Not rolling over might be advantageous if you are substantially younger than 59 ½ and need immediate access to your late spouse’s retirement accounts. If you roll over, and take distributions from your IRA before you are 59 ½, the distributions would be subject to a 10% excise tax, in addition to the regular income tax. If you leave your spouse’s account intact, withdrawals are considered to be paid on account of your spouse’s death, an exception to the pre-59 ½ premature distribution 10% excise tax.

For example, if you are 52-years-old at your spouse’s death and were to roll over your deceased spouse’s retirement plan, you could not take a distribution from the rollover IRA without a 10% penalty until you attained 59 ½ (a 7 ½ year wait).

By contrast, if you leave your spouse’s account intact, withdrawals may be taken without penalty (they would, however, be subject to income tax), since the distributions are on account of the death of the participant (an exception to the 10% penalty on pre-59 ½ distributions).

If you are not the designated beneficiary, your spouse’s entire account balance must be distributed to the named beneficiary in accordance with either the five-year rule described above, or over the life expectancy of the beneficiary. Under the life expectancy method, distributions must commence no later than the end of the calendar year following your spouse’s death.

If your spouse named multiple beneficiaries or a trust, life expectancy is determined based on the life expectancy of the oldest beneficiary or the oldest trust beneficiary. If a trust is named as beneficiary, it is extremely important that a copy of the trust (or a certification of trust that complies with IRS Regulations) be supplied to the Plan Administrator (IRA Custodian) prior to December 31 of the year following death.

Distribution on death after RMDs have begun

The rules for distributions after RMDs have begun (meaning that your spouse was at least 70 ½ at the time of his or her death) are very similar to those for pre-RMD death described above. First, you may roll your spouse’s interest over into your own IRA. Once rolled, RMDs are based on your age, not your late spouse’s.

Consequently, if you are younger than 70 ½, RMDs will cease until your required beginning date (except that you must take your spouse’s RMD for the year of his death). When RMDs do begin, you are eligible to use the Uniform Table. At your death, your beneficiaries will be able to take the balance of your account over their life expectancy.

If you do not roll over, distributions during your life and after your death must be based on your life expectancy (rather than the longer Uniform Table during life and your children’s life expectancy after your death).

Thus, the case for rolling over is even more compelling where death occurs after RMDs have begun. In addition to the extended deferral available to you and your children, you may be able to discontinue RMDs altogether after your spouse’s death if you are not yet 70 ½.