Understanding Spousal IRA Beneficiary RMD Rules

This column reviews three important required minimum distribution (RMD) rulings with regard to the naming of a surviving spouse as the beneficiary of the deceased spouse’s traditional IRA. These three rulings are:                       (1) “Election of Surviving Spouse to Treat Inherited IRA as Spouse’s Own IRA” in the preamble to a document published by the Department of the Treasury on April 17,2002 entitled; “Required Distribution from Retirement Plans”; (2) Treasury Regulation Section 1.408-8-Q-5 and A-5; and (3) Section 327 of SECURE Act 2.0.

The last paragraph of the section entitled “Election of Surviving Spouse to Treat Inherited IRA as Spouse’s Own IRA” reads as follows:

“If the spouse actually took a distribution from the IRA, the spouse is permitted to roll that distribution over within 60 days into an IRA in the spouse’s own name to the extend that the distribution is not a required distribution, regardless of whether or not the spouse is the sole beneficiary of the IRA rollover. Further, if the distribution is received by the spouse before the year that the IRA owner would have been age 70.5, no portion of the distribution is a required minimum distribution for purposes of determining whether it is eligible to be rolled over by the surviving spouse.”

This statement establishes the rule that a surviving spouse who receives a distribution as a beneficiary from the decedent’s IRA, and who then rolls that distribution over into their own IRA within 60 days of receipt, will avoid having the distribution treated as a taxable distribution. If the deceased had reached his or her required be0ginning date (RBD) and therefore is subject to a traditional IRA RMD, then the one condition to this tax-deferred privilege is a named beneficiary (the surviving spouse if the only named beneficiary) must take the year- of-death RMD first in order to satisfy the deceased spouse’s RMD requirement. If the year-of -death RMD is not taken, then that portion of the distribution to the surviving spouse cannot be rolled over and would have to be reported as taxable income.

Note the following with respect to the surviving spouse’s rollover:

1. A rollover can be either direct or indirect. A direct rollover is one in which the trustee of one traditional IRA transfers the IRA assets to the trustee of another traditional IRA without money coming into the hands of the account owner.

An indirect rollover is one in which the money is paid either to the traditional IRA owner or to the beneficiary of the traditional IRA. That individual must then turn around and reinvest all of the money into a traditional IRA or other qualified retirement plan before the expiration of the 60-day period in order to avoid a taxable event.

1. SECURE Act and SECURE Act 2.0 rules modified the age for RMDs. Under the SECURE Act and SECURE Act 2.0, the required beginning date (RBD)  (the age for starting to take RMDs) was changed. Table 1 summarizes by birthdate the RBD.

                           Table 1. Required Beginning Date for RMDs by Date of Birth

For a deceased spouse who owns a traditional IRA, an alternative to rolling over the deceased spouse’s IRA to his or her own traditional IRA is for the surviving spouse to formally elect to treat the decedent’s IRA as the surviving spouse’s IRA. This election does not require a rollover of funds. As detailed and outlined in Treasury Regulation Section 1.408-8, it only requires the surviving spouse to redesignate the account as his or her own IRA.

If the surviving spouse elects to redesignate the deceased spouse’s traditional IRA as his or her own, the traditional IRA is then treated as his or her own as of the beginning of the year when the election is made. Note, however, if the deceased spouse had reached his or her RBD and had not taken the RMD prior to his or her death, then that RMD must still be taken.

The last rule discussed is a provision  passed as part of SECURE Act 2.0 and publicized in Section 327. This rule took effect as of January 1, 2024. On July 18, 2024, the IRS issued proposed regulations on the RMD rules from the SECURE Act. One significant part of these proposed regulations is the IRS’ interpretation of Section 327.

According to the Senate Finance Committee Report (which explains the provisions of SECURE Act 2.0), Section 327 allows a surviving spouse “to be treated as the deceased spouse”. But what exactly does allowing the surviving spouse “to be treated as the deceased spouse” mean?

While the statute is not clear, the IRS in the proposed regulations explains the rules. Under the proposed regulations, a surviving spousal IRA beneficiary of a deceased spouse who died before his or her RBD can delay RMDs until the deceased spouse would have reached his or her required beginning date (RBD) (currently age 73) at which time the RMDs must start. When RMDs start on the surviving spouse’s inherited IRA, the surviving spouse will calculate RMDs using his or her age and the IRS’ Uniform Lifetime life expectancy table. Note that the Uniform Lifetime Table has been used until now only to calculate RMDs during a traditional IRA owner’s lifetime.

It should also be noted that when Section 327 applies, the traditional IRA is still considered an inherited account. This means that the 10 percent early distribution penalty for a spousal beneficiary does not apply. This is good news for young spouse IRA beneficiaries who may need the funds from the IRA. The following example illustrates:

Darren died in March 2024 at age 60. His traditional IRA beneficiary is his spouse Louise who is age 56. Louise will not have to take RMDs on the automatically created inherited IRA until Darren would have been required to start RMDs (age 75). This will allow Louise to delay RMDs for 15 years. When Louise starts taking RMDs she will use her age at the time (age 71) and the Uniform Lifetime life expectancy table. In the meantime, Louise can make penalty-free (no 10 percent early withdrawal penalty)withdrawals  from her inherited traditional IRA at any time.