Spouse Beneficiaries Face New Deadline, Additional Changes, Under Proposed RMD Regs
By Jodie Norquist, CIP, CHSP
When spouse beneficiaries come in to settle their inherited retirement accounts, you and your staff may want to share with them how the proposed RMD regulations could affect their financial decisions.
The new RMD rules have not yet been finalized, but the regulations are proposed to be effective as of January 1, 2022, and may affect the beneficiary elections that surviving spouses would have to make this year.
To summarize, the two biggest changes include a new deadline for spouse beneficiaries to treat inherited IRA assets as their own, and a new “hypothetical RMD” that may apply to certain spouse beneficiaries.
Requirements Under the Current Regulations
Spouses have always been subject to special rules when they inherit qualified retirement plan or IRA assets. Spouse beneficiaries have greater flexibility than nonspouse beneficiaries. This flexibility will generally remain under the proposed rules.
Treat As Own Option
Under the current rules, a surviving spouse of an IRA owner has the option to “treat as own” at any time and at any age, as long as the surviving spouse is the sole beneficiary or, if there are multiple beneficiaries, separate accounting has been applied timely. If separate accounting is not applied timely, then the spouse beneficiary could take a distribution and, if eligible, roll over the assets to her own IRA.
A spouse is deemed to treat an IRA as his own if he
transfers the IRA assets to his own IRA,
makes a contribution to the inherited IRA, or
fails to withdraw a required distribution from the inherited IRA.
Instead of immediately treating an IRA as his own, a spouse may choose to keep the assets in an inherited IRA, at least temporarily. For example, a spouse beneficiary under age 59½ may want the option of being able to take death distributions, which are exempt from the 10 percent early distribution penalty tax. Once the spouse attains age 59½, he will no longer be subject to the 10 percent early distribution penalty tax and may decide to transfer the assets to his own IRA at that time.
Requirements Under the Proposed RMD Regulations
Under the proposed regulations, a spouse beneficiary could treat an inherited IRA as her own in the same manner as under the current regulations, but now with a specific deadline. The proposed deadline for this election is the later of
the year following the account owner’s death, or
the year in which the spouse beneficiary reaches age 72.
After these dates, a spouse beneficiary could not treat the IRA as her own, but could distribute and roll over the inherited assets to her own IRA, if eligible.
Example: James, age 70, died on March 18, 2022. His wife, Amanda, age 62, is the sole beneficiary of his IRA. Amanda can either transfer the assets to her own IRA or leave them in an inherited IRA. If Amanda decides to transfer the assets to her own IRA, she must—assuming these regulations are finalized as proposed—do so by December 31, 2032, the year in which Amanda would have turned 72, which is later than 2023, the year after the year in which James died. After that date, Amanda could still take a distribution and roll over the assets to her own IRA if eligible.
“Hypothetical RMDs”
Under these proposed regulations, a surviving spouse who initially chose to distribute assets under the 5-year rule or the 10-year rule may need to take a hypothetical RMD if he later decides to roll over the inherited assets to his own IRA. The hypothetical RMD equals an amount that would have been required to be distributed had the life expectancy rule applied to the spouse beneficiary. The spouse must exclude this amount from any rollover contribution.
Spouse beneficiaries may be required to take hypothetical RMDs if
the account owner died before the required beginning date (RBD),
the spouse beneficiary had elected the 5-year or 10-year rule, and
the spouse beneficiary rolls over inherited assets to his own IRA before the last year in the period and in a year that the spouse attains age 72 or older.
Example: Patti, age 66, died on May 18, 2022, leaving her IRA to her husband, Mark, age 64. At first, Mark decides to keep the assets in an inherited IRA and distribute them under the 10-year rule. Mark does not take a distribution until 2031, at which time Mark decides to roll over the assets to his own IRA. Because Mark is 73, he has to calculate two hypothetical RMDs, based on his single life expectancy in the years that he would have had to take payments. These hypothetical RMDs are ineligible to be rolled over, so Mark distributes the hypothetical RMDs before rolling over the remaining balance to his own IRA.
No Transition Guidance Yet
As of this writing, the IRS has not provided transition guidance for implementing these new rules. We may see more clarification when the IRS releases the final regulations, which may occur several months after a public hearing on the proposed RMD regulations takes place on June 15, 2022. It should be further noted that retirement industry organizations have requested a delay in implementation of these regulations, given the fact that the IRS has not had time to receive and consider public and industry input, and the time it may take to implement the changes.
