A Surviving Spouse s Options with Respect to Their Deceased Spouse s IRA

Rev 7/11/2018 A Surviving Spouse s Options with Respect to Their Deceased Spouse s IRA We request you sign in by 8:20 and 12:20 as this allows an efficient start of the webinar The Webinar will be starting shortly Webinar times 8:30am or 12:30 pm Copyright 2018 Collin W. Fritz & Associates, Ltd. The Pension Specialists All rights reserved. No part of this presentation may be reproduced in any form and by any means without prior written permission from Collin W. Fritz & Associates, Ltd. 1

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Overview Once the IRA accountholder dies, the individual(s) who was designated as the primary beneficiary acquires a legal interest in the IRA. The terms used to describe this situation are an inherited IRA or a beneficiary IRA. A spouse beneficiary, as any inheriting beneficiary, will be required to take required distributions from the decedent s IRA. This presentation discusses the special tax rules applying to a spouse beneficiary. He or she may be a sole primary beneficiary or he or she may be one of multiple beneficiaries. The rules differ if the spouse is the sole primary beneficiary. An inherited IRA exists until the surviving spouse elects to treat it as his or her own IRA or until a distribution is taken and rolled over. All Spouse beneficiaries have rollover rights Non-spouses beneficiaries are prohibited from rolling over inherited IRA funds Collin W. Fritz & Associates, Ltd. The Pension Specialists 4

Overview Contributions Deductible Non-Deductible Rollovers Transfers Custodial or Trust Account Earnings within Account are not Taxed Distributions Accountholder Before Age 59½ Age 59½ to 70½ Age 70½ and older mandatory Distributions Beneficiaries Original Subsequent Mandatory Distributions In general, the accountholder or beneficiary will include the distribution in income and pay tax at the marginal tax rate The Traditional IRA Life Span 5

1. Treat as Own only if sole primary beneficiary 2. Rollover into own IRA 3. Keep as an Inherited IRA Contributions Deductible Non-Deductible Transfer Rollover Custodial or trust Account Earnings within Account are not Taxed Distributions Accountholder Before Age 59½ Age 59½ to 70½ and older Beneficiaries Original Subsequent In general, the beneficiary will include the distribution in income and pay tax but will not owe the 10% tax. Collin W. Fritz & Associates, Ltd. The Pension Specialists 6

Overview Special rules apply to an inherited IRA. First, an inherited IRA must make required distributions to the beneficiary(ies). Second, there can be no additional contributions made. If such distributions are not made by the appropriate deadline, a beneficiary is liable to pay a 50% excise tax of the amount required to be withdrawn. Types of Inherited IRAs Traditional SEP-IRA SIMPLE-IRA Roth Traditional IRAs will be discussed first. All of the distribution rules applying to a traditional IRA, also apply to a SEP-IRA and SIMPLE-IRA. Roth IRAs will be discussed second. Collin W. Fritz & Associates, Ltd. The Pension Specialists 7

A Spouse Beneficiary Elects to Treat as own Decedent s Spouse s IRA Own IRA of Surviving Spouse Non-Reportable Transfer. 9

Decedent s Spouse s IRA Inherited IRA for a Spouse Beneficiary Non-Reportable Transfer. Collin W. Fritz & Associates, Ltd. The Pension Specialists 10

Traditional IRA Owner has Died Before Decedent s Required Beginning Date On or After Decedent s Required Beginning Date Spouse Beneficiary Who is Sole Beneficiary Non-Spouse or Spouse Who is not Sole Beneficiary Qualified Trust Estate, Non- Qualified Trust, Church or Charity Spouse Beneficiary Who is Sole Beneficiary Non-Spouse or Spouse Who is not Sole Beneficiary Qualified Trust Estate, Non- Qualified Trust, Church or Charity Treat as Own Treat as Own Special Life Distribution Rule 5-Year Rule Standard Life distribution rule 5-Year Rule Standard Life distribution rule using the oldest trust beneficiary 5-Year Rule 5-Year Rule Is mandatory Special Life Distribution Rule Standard Life distribution rule Standard Life distribution rule using the oldest trust beneficiary Special Life rule using the decedent s age as of the year he or she died. 11

Roth IRA Beneficiary Rules and Options Roth IRA Owner has Died Spouse Beneficiary Who is Sole Beneficiary Non-Spouse or Spouse Who is not Sole Beneficiary Qualified Trust Estate, Non- Qualified Trust, Church or Charity Treat as Own Standard Life distribution rule Standard Life distribution rule using the oldest trust beneficiary 5-Year Rule Is mandatory Special Life Distribution Rule 5-Year Rule 5-Year Rule 5-Year Rule 12

Roth IRA Beneficiary Rules and Options (continued) Discussion 1. Unlike with the traditional IRA, the beneficiary is never required to take an RMD for the year the Roth IRA owner died since the Roth IRA owner is not required to take an RMD while alive. 2. A surviving spouse who is the sole beneficiary almost always will wish to elect to treat the deceased spouse s Roth IRA as his or her own in the year the deceased Roth IRA owner died. By treating as own, the surviving spouse is not required to taken an RMD while alive. 3. A surviving spouse who is NOT the sole beneficiary almost always will wish to take a distribution and then make a rollover contribution into his or her own Roth IRA. The standard once per year and 60 day rollover will apply. If the distribution occurs after the year of death, the surviving spouse will be able to roll over such funds into his or her own Roth IRA, but any RMD for such year is ineligible to be rolled over. 4. If there are multiple beneficiaries, the separate accounting rules must be met by all beneficiaries by December 31 of the year following the death of the deceased Roth owner, or application of the 5-year rule will be mandatory. That is, the Roth IRA must be closed by December 31 st of the year containing the fifth anniversary of the death of the Roth IRA owner. 5. Most non-spouse beneficiaries will take only the required amount as this will maximize the tax-free income to be earned. 13

Overview of Surviving Spouse s Options Traditional IRA 1. Elect as own (Applies only if he or she is sole beneficiary) 2. Life distribution rule actually 2 rules a. If sole beneficiary b. If not sole beneficiary same rules applying to a non-spouse beneficiary 3. 5 Year Rule (Applies only if death occurred before the RBD *) * The Note applies only to a traditional IRA. The 5 year rule always applies to Roth IRA regardless of how old the deceased spouse was when he or she died and in some situations is mandatory. 14

Overview of Surviving Spouse s Options Roth IRA 1. Elect as own (Applies only if he or she is sole beneficiary) 2. Life distribution rule actually 2 rules a. If sole beneficiary b. If not sole beneficiary same rules applying to a non-spouse beneficiary 3. 5 Year Rule The 5 year rule always applies to Roth IRA regardless of how old the deceased spouse was when he or she died and in some situations is mandatory. With respect to an inherited Roth IRA a surviving spouse will almost always elect to treat the deceased spouse s Roth IRA as own or take a distribution and roll it over. Why? Surviving spouse is now the Roth IRA owner and is not required to take distributions while alive. 15

Special IRS Language and Electing As Own A spouse beneficiary will make this election by indicating on an administrative form or by writing a letter that he or she wishes to treat the spouse s Roth IRA as his or her own or by doing a rollover. The IRS has written the Roth IRA plan agreement to state that if a spouse is designated as a beneficiary, the deceased spouse s Roth IRA automatically, upon his or her death, becomes the surviving spouse s Roth IRA. This may or may not always be desirable. The IRS has stated the Roth IRA plan agreement may be revised to provide that a surviving spouse is deemed to have treated the deceased spouse s Roth IRA as his or her own unless he or she elects one of the other two options. So, a surviving spouse will want to determine whether the Roth IRA plan agreement gives him or her the right to use the life-distribution rule or the 5-year rule. In many cases, it will be best for the surviving spouse to simply become the Roth IRA accountholder with respect to his or her spouse s Roth IRA. However, there will be times when he or she does not want to treat the inherited Roth IRA as his or her own Roth IRA right away. 16

Roth IRA Situations To Avoid 1. Primary beneficiary is spouse, the contingent beneficiary is the accountholder s estate, and the spouse predeceases the accountholder. 2. Primary beneficiary is the estate in any situation 3. A trust is the designated beneficiary and the beneficiaries of the trust are individuals and charities. 17

Rollover Rights A Surviving spouse may roll over all of his or her deceased spouse s IRA as long as the standard rollover rules are satisfied, excluding any RMD for the year. This is true even though a spouse beneficiary does not have the right to elect treat the deceased spouse s IRA as his or her own because he or she is not the sole beneficiary, or for some other reason. All of the standard rollover rules must be met: 1. Cannot rollover an RMD 2. The once per year rule 3. The 60 day rule. The spouse rolls it over into his or her personal IRA; the rollover is not into another inherited IRA. 18

Being Married Results in Substantial Tax Benefits for the Surviving Spouse of an IRA Owner and His/Her Beneficiaries In this article it is explained that two individuals who are not married should consider getting married if one or both has in IRA because the tax benefits which may be realized by a married beneficiary far exceed the tax benefits which may be realized by a non-spouse beneficiary. A basic U.S. income tax law is - if income is earned during a given year then income tax will need to be paid for that year. IRAs and other tax preferred plans are not subject to this basic tax rule. The income earned within a traditional IRA or a 401(k) plan is not subject to being taxed until it is withdrawn from the IRA or the 401(k) plan. Taxation of the income is tax-deferred. This means the account grows larger and faster than if taxes are paid annually. Tax deferral of the income is one of the great benefits when a person inherits an IRA. He or she is not required to take a lump sum distribution and include the entire distribution in taxable income. Rather, the tax rules in general allow a non-spouse beneficiary to start withdrawing their RMDs over their life expectancy starting with the year after the year the IRA owner died. This means that although there has been deferral of previously earned income there will also be deferral of the income earned by the inherited IRA in future years. This deferral is limited. In contrast, a married spouse beneficiary who elects to treat their deceased spouse's IRA as their own IRA or who rollovers the deceased spouse's IRA into their own IRA is not required to take a distribution until the year he or she attains age 70½. There will be many more years of tax deferral since distributions are not required to start the year following the year the IRA owner died and will be based on the life expectancy of the married 19

Being Married Results in Substantial Tax Benefits for the Surviving Spouse of an IRA Owner and His/Her Beneficiaries (Continued) There will be many more years of tax deferral since distributions are not required to start the year following the year the IRA owner died and will be based on the life expectancy of the married spouse's beneficiary rather than the married spouse. Federal tax law currently favors a married IRA beneficiary versus an unmarried IRA beneficiary when applying the required distribution rules. Federal law does not grant such special tax treatment to a non-spouse beneficiary. Since 1978 a non-spouse beneficiary has not had the right to take a distribution from a decedent's IRA and then roll it over into their own personal IRA or another inherited IRA. A non-spouse beneficiary has no right to treated the decedent s IRA as his or her own or to make a rollover. For discussion purposes we have two individuals, Rita and Philip. They have been together for 15 years. They have never married. Rita was born on May 2, 1960 and Philip was born on June 10, 1975. In 2016 she was age 56 and he was age 41. Rita learned in March of 2016 that she had cancer and her life expectancy was only 9-15 months. She died on January 1, 2017, when the fair market value of her IRA was $80,000. After her diagnosis, Rita considered if she should keep or change her IRA beneficiary designation. In 2005 she had designated Philip as her sole IRA primary beneficiary. She also wondered what difference it would make for Philip if they were married. 20

Being Married Results in Substantial Tax Benefits for the Surviving Spouse of an IRA Owner and His/Her Beneficiaries (Continued) The following discussion shows that Philip and his beneficiaries will have the chance to benefit greatly if Philip is the surviving spouse beneficiary of her traditional IRA rather than if he was a non-spouse beneficiary. What RMD distribution schedule will apply to Philip if he and Rita were not married prior to January 1, 2017? Philip as a non-spouse beneficiary will be required to commence his required distributions in 2018. For illustration purposes, a 4% earnings rate is assumed. Assuming that only the required distribution is withdrawn each year, the total to be distributed over the next 41.7 years will be $218,132.15. Such distributions will either be made to Phil or to his successor beneficiaries. Philip as a spouse beneficiary who elects to treat Rita s IRA as his own (or makes a rollover) will be subject to the standard RMD rules. He must take an RMD for the year he attains age 70 1/2 (2046). Tax deferral for an additional 29 years is a very valuable tax benefit. The $80,000 increases to $249,492.12 over this 29 year period. The IRA is no longer an inherited IRA of a non-spouse beneficiary so he is not required to commence distributions the year after she dies. He may take normal distributions as he wishes. 21

Being Married Results in Substantial Tax Benefits for the Surviving Spouse of an IRA Owner and His/Her Beneficiaries (Continued) Phil was able to treat Rita s IRA as his own because they were married. The combined RMD chart on page 7 shows the RMDs to be withdrawn by Phil while he is alive and then those to be paid to his beneficiary after his death in 2060. Note that he commences distributions in 2046, the year he attains age 70½. The IRA has grown to be $249,492.12. Phil takes his RMD for 2046-2060 when he dies at the age of 84. Because he was a spouse beneficiary who elected to treat Rita s IRA as his own, his beneficiary born on 7/7/2006 is able to take his RMDs over his life expectancy of 29.6 commencing in 2061 when he is age 55. Note that the total payout to Phil and his beneficiary is $591,877.46 whereas it is only $218,132.31 if Phil would be a non-spouse beneficiary. The difference is substantial and it is due to the longer time period the funds stay within an IRA and the related tax deferral. It is very clear that Phil and his beneficiary Anna will benefit greatly if Phil is a spouse beneficiary rather than a non-spouse beneficiary. 22

Determinations by the Surviving Spouse Determine the type, or types of IRAs the deceased spouse owned Determine number of IRA plan agreements which he or she had with various IRA custodians/trustees Different set of rules for traditional and Roth IRAs What a surviving spouse decides to do for a traditional IRA need not be the same as for a Roth IRA Not required to make the same elections for all traditional IRAs, or Roth IRAs. Elections to be made on a per plan agreement basis. With respect to each inherited IRA, the spouse needs to determine if he or she is the sole beneficiary 26

Determine Is the spouse beneficiary the sole beneficiary? Is the spouse beneficiary not the sole beneficiary? Deadline for being the sole beneficiary September 30 th of the year following the year the spouse died No need to establish an inherited IRA on the data processing system if the surviving spouse elects to treat the deceased spouse s IRA as his or her own in the same year in which the spouse died. There is a need to establish an inherited account on the data processing system if the surviving spouse does not elect to treat the deceased spouse s IRA as his or her own IRA in the same year in which the spouse died. 27

Second Determination - General concepts and rules Elect as Own IRA, or Keep as an Inherited IRA When both spouses are age 59½ and older, the surviving spouse will normally elect to treat the deceased spouse s IRA as their own. The required distribution amount to be made to the surviving spouse as an IRA accountholder, (who will use the Uniform Lifetime Table) if any, is smaller than the required distribution which must be made to the spouse as a beneficiary (who will use the Single Life Table). A surviving spouse regardless of age may elect as own. When the surviving spouse is younger than age 59½, he or she may wish to keep as an inherited IRA. This gives him or her the flexibility to take distributions prior to age 59½ and not owe the 10% tax. Can start with life distribution rule or 5 year rule and then later to treat as own. No time deadline to treat as own. 28

Administrative Alternatives Deceased Spouse s IRA Deceased Spouse s IRA transferred transferred Surviving Spouse s IRA Inherited IRA for Surviving Spouse Deceased Spouse s IRA transferred Inherited IRA for Surviving Spouse transferred Surviving Spouse s IRA Deceased Spouse s IRA distribution Surviving Spouse Roll over contribution Surviving Spouse s IRA Deceased Spouse s IRA transferred Inherited IRA for Surviving Spouse distribution Surviving Spouse Roll over contribution Surviving Spouse s IRA 29

Spouses Age 59½ to 99 Treat as Own or Rollover Spouses Age 54½ to 59½ 5 Year Rule then treat as own at 59½ or Rollover Spouses Age 20 to 54½ Life Distribution Rule then treat as own at age 59½ or Rollover 30

No Inherited IRA if the Surviving Spouse Elects to Treat as Own or Rolls it over There is no longer an inherited IRA when a surviving spouse elects to treat the IRA of the deceased spouse as his or her own or Rolls it over. The surviving spouse is treated as if he or she had originally contributed the funds. If he or she takes a pre-59½ distribution, the 10% additional tax will be owed unless an exception (other than death) applies. The 70½ required distribution rules will apply, if applicable, for the years after the year the spouse died. Only a spouse beneficiary who is the sole primary beneficiary may treat the deceased spouse s IRA as his or her own IRA. Deadline to be sole beneficiary is September 30, of following year. Separate accounting does not work to make a surviving spouse a sole beneficiary. For informational purposes, it may be nice for an IRA custodian to know that the funds in a person s IRA arose because they acquired their deceased spouse s IRA. However, from an income tax standpoint, when the surviving spouse takes a distribution from his or her IRA, it is as if he or she had been the original contributor of the funds. 31

Understanding the Tax Consequences of Treating as Own When funds are withdrawn or distributed from this IRA, the spouse will generally include the full amount in gross income for federal income tax purposes. The amount of tax he or she will need to pay because of the IRA distribution will be added to other income, and he or she will pay tax at whatever the marginal income tax bracket would require. If the deceased spouse had a nontaxable amount within his or her IRA because he or she had made nondeductible contributions to the traditional IRA, or had rolled over nondeductible contributions from a 401(k) plan or other pension plan, then the surviving spouse assumes such basis and a portion of his or her distributions will not be taxed. A spouse beneficiary, will want to consult with their tax advisor. A spouse beneficiary requires the tax position of the deceased spouse with respect to the 5-year rule applying to Roth IRAs. The surviving spouse is able to aggregate the time period of both spouses. 32

Understanding the Tax Consequences of Electing as Own By treating a deceased spouse s IRA as his or her own IRA, the surviving spouse is able to continue the tax benefit that taxation of the earnings is deferred until actually distributed, as is taxation of the original contributions. As with other traditional IRAs, he or she may convert these funds to a Roth IRA. 33

Custodian s Procedures to Transfer to Surviving Spouse s IRA Transfer to the Spouse s Existing IRA or Establish a New IRA Transfer-out of decedent s IRA is a non-reportable distribution Transfer-in to surviving spouse s IRA is a non-reportable contribution 34

Four Ways To Elect As Own First, the surviving spouse instructs the IRA custodian in writing that he or she is electing to treat the deceased spouse s IRA as his or her own. There will be forms to make this election. Second, the surviving spouse may re-designate the deceased owner s IRA so that the IRA bears his or her name as an owner and not as a beneficiary. This redesignation may be made by transferring the funds from the deceased owner s IRA to the IRA of the surviving spouse. Third, an automatic election takes place if the surviving spouse fails to take an RMD by a deadline. Fourth, an automatic election occurs if the surviving spouse makes a regular contribution to the inherited IRA. 36

What rules apply if the IRA accountholder dies prior to the year he or she would attain age 70½? Example 25, 30, 51, 61, 68 etc. No RMD is required for year of the spouse s death. What rules apply if the IRA Accountholder dies during the year he or she attains or would attain age 70½? There is an RMD. The RMD is determined by using a special rule if the beneficiary is a spouse beneficiary. For purposes of the RMD calculation, it is assumed that the IRA accountholder did not die, rather he or she lived for the entire year. The practical effect of this is that there is a RMD for the year of death. 38

1 2 IRS Authority For the Special Rule The IRS adopted the final RMD regulation on May 13, 2002. The IRS furnished an Explanation of Provisions. That is, this special rule is stated in the explanation. It is not stated in the regulation. These final regulations provide that the election can be made at any time after the IRA owner s date of death, while clarifying that the minimum required distribution for the calendar year of the IRA s owner s death is determined assuming the IRA owner lived throughout the year. These regulations also clarify that the surviving spouse is required to receive a minimum distribution for the year of the IRA owner s death only to the extent that the amount required was not distributed to the owner before death. 39

Effect of the Special Rule A literal reading of the statutory law is that there is no RMD due when an IRA accountholder dies before his or her required beginning date. The effect of the regulation is to create an RMD for the 70½ year even when the accountholder dies before his or her required beginning date. 40

Rule To the extent the RMD had not been to distributed to the deceased spouse, the surviving spouse must withdraw it by the appropriate deadline. This is true regardless of whether the surviving spouse elects to treat the decedent s IRA as his or her own or as an inherited IRA. 41

Situation # 1 IRA Owner Dies During the Year of Attaining Age 70½ Spouse Beneficiary is Younger than Age 70½ Illustration # 1. John Doe was born on March 13, 1946. He died on June 12, 2016. He died during the 70½ year, but before his required beginning date. His sole beneficiary was his wife, Ann Doe, age 65. The IRA custodian had calculated John Doe s RMD to be $750 ($20,550 / 27.4). No portion of the $750 had been paid to him prior to his death. Ann will need to be paid this $750 by December 31, 2016. If Ann elects to treat his IRA as her own either in 2016, Ann will not need to take another RMD until she attains age 70½. 42

Situation # 2 IRA Owner Dies During the Year of Attaining Age 70½ Spouse Beneficiary is Older than Age 70½ Illustration # 2. John Doe was born on March 13, 1946. He died on June 12, 2016. He died during the 70½ year, but before his required beginning date. His sole beneficiary was his wife, Ann Doe, age 75. The IRA custodian had calculated John Doe s RMD to be $750 ($20,550 / 27.4). No portion of the $750 had been paid to him prior to his death. Even if Ann elects to treat his IRA as her own in 2016, she must take as her RMD, John s RMD which he had not yet been paid. This would be $750. She would need to take RMDs for 2016 and subsequent years based on her age by using the uniform lifetime table. 43

What rules apply if the IRA accountholder dies on or after his or her required beginning date? The RMD for the year of death is determined by using the special rule calculated for the accountholder since he or she is assumed to have lived the entire year. The RMD for the surviving spouse for subsequent years will be based on the age of the surviving spouse and the Uniform Life Table. 44

A Situation When a Surviving Spouse Should Elect to Treat Own, the Earlier, the Better Deceased Spouse s IRA as Example: John Morgan was born March 13, 1941. He is age 75 for 2016 RMD purposes. His IRA balance as of 12/31/2015 was $69,000. His required distribution for 2016 is $3,013.10 ($69,000 / 22.9). Louise Morgan was born on September 15, 1944. She is age 72. Her IRA balance as of 12/31/2015 was $78,000. Her required distribution for 2016 is $3,046.88 ($78,000 / 25.6). John and Louise are married. John dies on February 6, 2016. Neither John nor Louise had been paid their required minimum distribution prior to John s death. What rules and options apply to this situation? It is assumed that she designates her daughter, Helen, who was born 10/10/1970 as her beneficiary. The RMD for the year of death must be paid to the spouse beneficiary to the extend not paid to the decedent prior to his death 45

A Situation When a Surviving Spouse Should Elect to Treat Deceased Spouse s IRA as Own, the Earlier, the Better. What will be the RMD distribution schedule if Louise treats John s IRA as her own? The RMD Divisor will be 24.7 for 2017 as she is 73 and the Uniform Lifetime Table is used. What will be the RMD distribution schedule if Louise maintains the IRA as an Inherited IRA? The RMD divisor will be 14.8 for 2017 as she is 73 and the Single Life Table is used. What distribution period will apply to Helen once Louise dies? If Louise had treated John s IRA as her own, then the distribution periods for Helen will be based on Helen s age deferred in the year following Louis s death. For example, if Louise died in 2018, then the divisor for 2019 would be based on Helen s age in 2019. Her age would be 49 and the divisor would be 35.1. She is able to stretch out distributions for 35 years. If Louise kept the IRA as an inherited IRA and she died in 2018, then the divisor for 2019 for Helen would be 12.8. She is able to stretch out distributions only for 12 years. 46

A Situation When a Surviving Spouse Should Elect to Treat Deceased Spouse s IRA as Own, the Earlier, the Better. What will be the RMD distribution schedule if Louise treats John s IRA as her own? Louise has the option of maintaining this IRA as an inherited IRA (e.g. Louise Morgan as beneficiary of John Morgan s IRA ). She, as any beneficiary, is required to take a required distribution each and every year commencing with 2017 (i.e. the year after the year of death) from the inherited IRA. It is assumed the balance of this IRA would be $72,000 as of 12/31/2016. Therefore, her 2017 RMD for this inherited IRA will be $4,864.86, determined as follows; $72,000 / 14.8. Note that the distribution period is based on Louise s age of 73 in 2017. It is assumed that she designated her daughter, Helen, who was born on 10/10/1960 as the beneficiary of this inherited IRA. 47

What Reporting Duties Apply when the Surviving Spouse Elects the Deceased Spouse s IRA as His or Her Own? Final FMV statement is to be prepared for the decedent for the year of death It will show the FMV either as $0.00 or as of the date of his or her death. Final Form 5498 is to be prepared for the decedent for the year of death It will show the FMV either as $0.00 or as of the date of his or her death. No Form 1099-R is prepared to report the Election/Transfer Distribution A 5498 Form will be prepared for the surviving spouse who elected as own. It will show the FMV as of December 31. The election/transfer contribution is not reported. 48

Surviving Spouse Maintains as an Inherited IRA For example, Jane Doe as beneficiary of John Doe s IRA There are two life distribution rules applying to a spouse beneficiary. Determine which one applies. 1. Spouse is sole beneficiary 2. Spouse is not the sole beneficiary same rules apply which apply to a non- spouse beneficiary 49

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is sole beneficiary If the IRA owner died before his or her required beginning date, then he or she must commence distribution by December 31 of the later of: (i) the year your spouse would have attained age 70½, or (ii) the year after the year he or she died. This special rule many times means the surviving spouse is not required to take a distribution for many years. For Example, John Doe born on 3-10-51 dies on 7-15-2015. His wife, Mary, born on 3-20-56 was his sole beneficiary. She must commence her RMD schedule by 12-31-2021 (i.e. the year he would have attained age 70½). She may take distributions before 2021 as she wishes. The 10% tax never applies to distributions to a beneficiary. 50

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is sole beneficiary Standard RMD Formula. It is the same formula which applies to a living IRA accountholder, except the life-expectancy table to be used is different. The Formula 12-31-xx FMV of Preceding Year = RMD for Current year Period from Single Life Table 51

Single Life Table (Used only by Beneficiaries) 52

Single Life Table (Used only by Beneficiaries) 53

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is sole beneficiary Recalculation Method (Not One Year Reduction) Go back to the Single Table each subsequent year to determine advisor Illustration Mary s RMD Schedule / Divisor. She must commence distributions by December 31 of the year he would have attained age 70½. Tax Year Mary s Age Divisor Deadline 2021 65 21.0 12-31-2021 2022 66 20.2 12-31-2022 2023 67 19.4 12-31-2023 2024 68 18.6 12-31-2024 2025 69 17.8 12-31-2025 2026 70 17.0 12-31-2026 Continues Continues Continues Continues 54

Inherited IRAs for Spouse Beneficiaries who is Sole Beneficiary The Basic Required Distribution Calculation Beneficiary RMD = FMV as of 12-31 preceding year / Divisor Year of Death Divisor Age FMV of Preceding Year 2% Interest RMD 2011 N/A $28,000 $560 N/A 1 2021 21.0 65 $34,132 $683 $1,625 2 2022 20.2 66 $33,190 $664 $1,643 3 2023 19.4 67 $32,211 $644 $1,660 4 2024 18.6 68 $31,195 $624 $1,677 5 2025 17.8 69 $30,142 $603 $1,693 Continues 55

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is sole beneficiary Designation of Beneficiary by the Surviving Spouse and what happens if the Spouse Beneficiary Dies Before Reaching the 70½ Deadline. He or she will want to designate his or her beneficiary(ies) to receive these funds after his or her death. Death of Surviving Spouse. If the surviving spouse dies before he or she was required to begin receiving distributions, the surviving spouse will be treated as if he or she were the owner of the IRA. However, this rule does not apply to the surviving spouse of a surviving spouse. Net Effect The RMD schedule applying to the beneficiary(ies) of the surviving spouse will be based on the age of the beneficiary(ies) and not the age of the spouse beneficiary even though the spouse beneficiary is the first beneficiary. 56

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is sole beneficiary Special Rule If the spouse beneficiary dies before the December 31 st of the year the original IRA accountholder would have attained age 70½, then for RMD calculation purposes, the spouse beneficiary is treated as if he or she was the IRA accountholder. Thus, the distribution period will be based on the beneficiaries rather than the second-to-die spouse. 57

Example: John Doe is the IRA Accountholder. He dies in 2011 at age 45. His wife, Jane, age 44, is his sole beneficiary. She does not elect to treat John s IRA as her own. She designates her daughter, Roberta, to be her beneficiary. Roberta is age 20 in 2011. Jane dies in 2014. The special rule provides that Jane is treated as if she was the IRA owner for purposes of applying the rules as to how the RMD is calculated for the beneficiary. This means the distribution period for distributions, to Roberta will be based on Roberta s age as determined in 2015. She will be age 24. Divisor is 59.1. 58

Maintain as an Inherited IRA (Spouse Does not Elect as Own) Life Distribution Rule Surviving Spouse is not the sole beneficiary If the spouse dies before his or her required beginning date then such spouse must commence distributions by December 31 st of the year after the year the IRA owner died. Annual payments are based on the single life expectancy of the spouse. The initial factor is based on age of the spouse as determined from Single Life Table. Subtract one for each subsequent year s factor. If the IRA owner died on or after the required beginning date, then a spouse beneficiary must be distributed the RMD calculated for this owner for the year of his or her death to the extent not yet distributed. If the IRA owner died on or after the required beginning date and the owner was younger than the spouse beneficiary, then use the age of the IRA owner to determine the divisor. 59

Single Life Table (Used only by Beneficiaries) 60

Single Life Table (Used only by Beneficiaries) 61

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is not the sole beneficiary 1 year Reduction Method (Not Recalculation Method) For example, John Doe born on 3-10-1950 died on 7-15-2011. His wife, Mary, born on 3-20-1966 was not his sole beneficiary. She must commence her RMD schedule by 12-31-2012 (i.e. the year after death). Deadline Mary s Age Divisor Illustration 12-31-2012 Mary s RMD Schedule 46 / Divisor 37.9 12-31-2013 47 36.9 12-31-2014 48 35.9 12-31-2015 49 34.9 12-31-2016 50 33.9 12-31-2017 51 32.9 Continue 62

Inherited IRAs for Spouse Beneficiaries who is NOT Sole Beneficiary The Basic Required Distribution Calculation Beneficiary RMD = FMV as of 12-31 preceding year / Divisor Divisor Age FMV of Preceding Year 2% Interest RMD Year of Death 2011 N/A $28,000 $560 N/A 1 2012 37.9 46 $28,560 $571 $753 2 2013 36.9 47 $28,378 $568 $769 3 2014 35.9 48 $28,177 $563 $785 4 2015 34.9 49 $27,955 $559 $801 5 2015 33.9 50 $27,713 $554 $817 This same schedule is used for subsequent beneficiary(ies) once the original beneficiary dies. 63

Maintain as an Inherited IRA (Do not Elect as Own) Life Distribution Rule Surviving Spouse is not the sole beneficiary Designation of Beneficiary by the Surviving Spouse. He or she will want to designate his or her beneficiary(ies) to receive these funds after his or her death. Death of Surviving spouse. If the designated beneficiary is the owner s surviving spouse, and he or she dies on or after he or she was required to begin receiving distributions, then the spouse s beneficiaries will have their RMD s based on the spouse s distribution schedule. The reduce by one method will continue to be used. 64

Maintain as an Inherited IRA (Do not Elect as Own) Five Year Rule. The surviving spouse, may elect to use the 5-year rule if his or her spouse died before his or her required beginning date. This option is unavailable where the IRA accountholder dies on or after his or her required beginning date (April 1 of the year following the attaining of age 70½). This election will generally be made the least frequently of the three options. The spouse beneficiary is required to withdraw all funds within the IRA by December 31 of the fifth year following the year his or her spouse died. In effect, the spouse beneficiary is able to take distributions during six(6) different tax years. There is no requirement to take periodic or schedule distributions. The only requirement is that all of the IRA funds be distributed by December 31 st of the year containing the fifth anniversary of the IRA owner s death. 65

What is the 5-Year rule? The IRA beneficiary must take sufficient distributions to close the inherited IRA by December 31 of the fifth year containing the Anniversary of the accountholder s death. There is no requirement to take out any specific amount in any year. In actuality, the beneficiary is allowed six calendar year to take his or her RMD s. Schedule # 1 Schedule # 2 Schedule # 3 Schedule # 4 Schedule # 4 Year of Death 2014 0% 0% 0% 100% 0% 1 2015 20% 0% 0% 0% 50% 2 2016 20% 0% 0% 0% 0% 3 2017 20% 33.3% 0% 0% 0% 4 2018 20% 33.3% 0% 0% 50% Remainder 5 2019 20% 33.3% 100% 0% 0% Remainder Remainder 66

Maintain as an Inherited IRA (Spouse Does not Elect as Own) Five Year Rule Surviving Spouse may either be the sole beneficiary or one of many beneficiaries. 2009 RMD Waiver Rule means beneficiary of IRA owners who died from 2004-2008 are given one additional year to close the inherited IRA. 67

Delaying Electing as Own Until Later A spouse beneficiary who is the sole beneficiary may maintain an inherited IRA either by using the life distribution rule or the five year rule and then after an indefinite number of years elect to treat the inherited IRA as his or her own. There is no time limit requiring the sole spouse beneficiary to make the election by a certain deadline. 68

Rollover Rights A Surviving spouse may roll over all of his or her deceased spouse s IRA as long as the standard rollover rules are satisfied, excluding any RMD for the year. This is true even though a spouse beneficiary does not have the right to elect treat the deceased spouse s IRA as his or her own because he or she is not sole beneficiary, or for some other reason. All of the standard rollover rules must be met: 1. Cannot rollover an RMD 2. The once per year rule 3. The 60 day rule. The spouse rolls it over into his or her personal IRA; the rollover is not into another inherited IRA. 69

Surviving Spouse 70

What Reporting Duties Apply when there is an Inherited IRA Established and Maintained? Final Form 5498 must be prepared for the deceased IRA Accountholder Per Instructions, FMV statement is also due Form 5498 is prepared for each inheriting beneficiary (including a spouse) Per Instructions, FMV statement is also due No Form 1099-R prepared for transfer from decedent s IRA to the surviving spouse s IRA 71

What Reporting Duties Apply when there is an Inherited IRA Established and Maintained? A final Form 5498 must be prepared using the IRA accountholder s name and social security number. The IRS has given the IRA custodian/trustee two options. It may either report the fair market value as of the date of death, or it may report a 0 and instruct the executor that he or she may request the value as of the date of death. A form 5498 must be prepared for each inheriting beneficiary showing the fair market value of his or her share as of December 31. If the value is 0 because the beneficiary withdrew his or her entire share, then a Form 5498 does not need to be prepared. 72

When it May be Best for the Surviving Spouse to Not Treat as Own Situation # 1. Dan (age 67) and Joan (age 73) each have an IRA for which the other is the sole beneficiary. Dan dies on March 10, 2008, before his required beginning date; his date of birth was 4-12-1942. Joan is already in distribution concerning her IRA. What choices does Joan have with respect to Dan s IRA? She has three choices Use the 5-year rule Use the life-distribution rule Treat it as her own 73

When it May be Best for the Surviving Spouse to Not Treat as Own Under the 5-year rule, she will have to take total distribution of the IRA by 12-31- 2014. Under the life-distribution rule, distribution must commence over Joan s life expectancy in the year Dan would have attained age 70½. He would have attained age 70½ on 10-12-2012. Therefore, Joan would have to commence distribution by 12-31-2012, calculated using her single life expectancy as determined from the Single Life-Expectancy Table, recalculated each year. The 5-year rule would be a better choice than the life distribution rule for Joan, because distribution would not start until two years later than under the lifedistribution rule. 74

When it May be Best for the Surviving Spouse to Not Treat as Own Joan also has the right (her third option) to treat the inherited IRA as her own. She could wait until the end of the 5 year period (12-31-2014) and then treat as her own. This right to treat a deceased spouse s IRA as her own IRA is a very valuable planning tool. Most likely she will want to treat this IRA as her own. By waiting, she is not required to take a distribution and pay taxes on it. 75

When it May be Best for the Surviving Spouse to Not Treat as Own Situation # 2. Mark (age 61) and Alice (age 49) each have an IRA for which the other is the sole beneficiary. Mark dies on March 10, 2011, before his required beginning date; his date of birth was 4-12-1942. Her date of birth is June 10, 1959. Alice has 8 years before she will be age 59½. In order to retain some flexibility to allow her to take distributions before age 59½ so she would not owe the 10% tax, she may well decide not to treat Mark s IRA as her own. What choices does Alice have with respect to Mark s IRA? She has three choices Use the 5-year rule Use the life-distribution rule most likely Treat it as her own 76

When it May be Best for the Surviving Spouse to Not Treat as Own Situation # 3. Dan (age 36) and Joan (age 33) each have an IRA for which the other is the sole beneficiary. Dan dies on March 10, 2010, before his required beginning date; What choices does Joan have with respect to Dan s IRA? She has three choices Use the 5-year rule Use the life-distribution rule most likely Treat it as her own In order to allow Joan to withdraw funds before age 59½ and not owe the 10% additional tax, most likely she would elect to use the life distribution rules when she attains age 59½, she could treat as own. 77

Adverse Consequences Resulting from Failing to Elect Deceased Spouse s IRA as Own It is not always in the best interest of a surviving spouse to treat the IRA of his or her spouse as his or her own IRA. The general rule, however, is that a spouse should do so. By electing to treat the spouse s IRA as his or her own, the spouse will receive the benefit of the Uniform Lifetime Table while alive, if applicable and the beneficiary(ies) will be entitled to a longer payout period. 78

Adverse Consequences Resulting from Failing to Elect Deceased Spouse s IRA as Own Example: A husband (Mike) and wife (Ann) each had their own IRA. Mike s date of birth was July 2, 1930. Ann s date of birth was August 15, 1930. Ann died in 2004. Her spouse, Mike, was her primary beneficiary. Mike never elected to treat Ann s IRA as his own. He had been paid each year the proper required distribution. Mike named their son, Tom, as his primary beneficiary of this inherited IRA (IRA # 1). Mike died on 4-22-2010. He had taken the 2010 RMD amount for IRA # 1 prior to his death. Tom was born on 8-13-1952. As mentioned, Mike had his own IRA (IRA # 2). Tom was his primary beneficiary. Mike had taken the 2010 RMD amount prior to his death. 79

Adverse Consequences Resulting from Failing to Elect Deceased Spouse s IRA as Own Tom is the inheriting beneficiary of two different IRAs. He inherited his Father s IRA. He inherited the IRA his father had inherited from his mother. There will need to be two distinct RMD calculations. One will require substantially more to be distributed than the other. Mike would have been doing Tom a favor if he had elected to treat Ann s IRA as his own. How will Tom s RMD amount for 2011 and subsequent years be determined with respect to IRA # 1 and IRA # 2? 80

RMD Schedule for Mike as beneficiary of Ann s IRA IRA # 1 and the Tom as beneficiary of Mike/Ann s IRA Divisor Age FMV of Prior Yr 2% Int RMD 2004 N/A $28,000 $560 N/A 1 2005 13.4 75 $28,560 $571 $2131 2 2006 12.7 76 $27,000 $540 $2126 3 2007 12.1 77 $25,414 $508 $2100 4 2008 11.4 78 $23,822 $476 $2090 5 2009 10.8 79 $22,208 $444 $2056 6 2010 10.2 80 $20,596 $412 $2019 7 2011 9.2 59 $18,989 $380 $2064 8 2012 8.2 60 $17,305 $346 $2110 9 2013 7.2 61 $15,541 $311 $2158 10 2014 6.2 62 $13,694 $274 $2209 11 2015 5.2 63 $11,759 $235 $2261 12 2016 4.2 64 $9,733 $195 $2317 13 2017 3.2 65 $7,617 $152 $2378 14 2018 2.2 66 $5,391 $108 $2450 15 2019 1.2 67 $3,049 $61 $2570 16 2020.2 68 $570 11 $581 $33.590 81

RMD Schedule for If Mike had Treated Ann s IRA as His Own in 2004 or 2005 Year Age Divisor 2005 75 22.9 2006 76 22.0 2007 77 21.2 2008 78 20.3 2009 79 19.5 2010 80 18.7 Mike Dies 2011 59 26.1 Tom is Inheriting Beneficiary 2012 60 25.1 2013 61 24.1 82

RMD Schedule for Tom as beneficiary of Mike s IRA IRA # 2 Year Age Divisor 2005 75 22.9 2006 76 22.0 2007 77 21.2 2008 78 20.3 2009 79 19.5 2010 80 18.7 Mike Dies 2011 59 26.1 2012 60 25.1 2013 61 24.1 2014 62 23.1 2015 63 22.1 2016 64 21.1 Continues Continu es Continues 83

A Surviving Spouse s Options with Respect to Their Spouse s IRA or IRAs Copyright 2018 Collin W. Fritz & Associates, Ltd. The Pension Specialists All rights reserved. No part of this presentation may be reproduced in any form and by any means without prior written permission from Collin W. Fritz & Associates, Ltd.