IRA Beneficiary -The Surviving Spouse’s Choices: the Election to Treat the Inherited IRA as Their IRA

Background: No one knows why this spousal election exists in the Regulations. One would assume that if a surviving spouse wants to be treated as the owner of their deceased spouse’s account why not just do a spousal rollover to their own rollover IRA. Existing  Treasury Regulations provide that a surviving spouse of a deceased IRA owner can elect to treat an inherited IRA from their deceased spouse’s IRA as the survivor’s own IRA. [Regulation 1.408-8, A-5(a).] In something of a surprise, the SECURE Act Proposed Regulations confirm this election, but they now impose a deadline on the spousal election. [Proposed Regulation 1.408-8(c).] This election results from an unintended rollover  of the decedent’s account into the survivor’s name if the survivor triggers a deemed election by failing to take a required minimum distribution (RMD.) Historically this spousal election was the result where the surviving spouse of an older married couple inadvertently triggered the deemed election by failing to take any action with regard to the inherited IRA. Under the old rules, this inadvertent election could be triggered at any time, even years after the IRA owner’s death, if the deemed election was not discovered shortly after the IRA owner’s death. The Proposed Regulations provide that this deemed election, via the failure to take an RMD, will occur when only one year’s or at most two years,’ worth of RMDs that have accrued are not taken. After that, the survivor’s failure to take an RMD as beneficiary of the deceased spouse’s IRA will trigger the customary 50% excise tax, but it will not cause a change of the survivor’s status from ‘beneficiary’ to ‘owner.’

Election Requirements: For a surviving spouse to elect to treat the inherited IRA as their own, there are a couple of requirements, which remain the same even after the SECURE Act Proposed Regulations:

Spouse as Sole Beneficiary: This condition is a bit misleading. If at the date of death of the IRA owner their spouse is one of many IRA designated beneficiaries, and he/she is not the sole beneficiary, that can be changed so that the survivor becomes the sole beneficiary.

Example: Ben and Jeri are married. Ben dies owning an IRA. Ben has named Jeri and their two grandchildren, Jack and Jill, as equal designated beneficiaries. As of the date of Ben’s death Jeri is not the sole beneficiary of his IRA. Obviously, Jeri is not a sole beneficiary. However, Jack and Jill can be disregarded if, by the beneficiary finalization date of September 30 of the year after Ben’s death they have been paid their separate shares, or Jack and Jill have disclaimed their interest in the IRA. Alternatively, by the finalization date, Ben’s IRA can be divided into separate accounts, one for each of the named designated beneficiaries, resulting in Jeri being the sole beneficiary of her separate share of the inherited IRA.

Entire Account: The survivor’s election must be made for the entire IRA account as it exists at the time of the election. Partial rollovers can be done, by taking distribution of just part of the inherited IRA and rolling that partial distribution to the survivor’s own IRA, or even taking a distribution and rolling over only a part of it. That said, a partial election is not permitted.

New Deadline: The new deadline for making the spousal election is December 31 of the year after the year of the IRA owner’s death, or if later, of the year the surviving spouse reaches age 72. [Proposed Regulations 1.408-8(c)(ii).] In the past, there was no deadline for this spousal election. Even when the survivor misses taking an RMD, he/she still possesses the option to roll the inherited IRA to their own rollover IRA. While there is a deadline imposed on the spousal election, there is no deadline associated with a surviving spouse’s right to roll over their deceased spouse’s IRA into their own rollover IRA.

Making the Election: Three different ways exist for the surviving spouse to elect to treat their deceased spouse’s inherited IRA as his/her own. [Proposed Regulations 1.408-8(c)(2).]

1. Redesignation: The survivor can redesignate the account as his/her own. This entails communicating the election to the IRA custodian and completing the paperwork to create the IRA in their own name, with the assets transferred to the ‘new’ IRA.
2. Make a Contribution: The survivor can be deemed to have elected the IRA as his/her own IRA by making a contribution to it, other than a rollover contribution from another retirement account inherited from the deceased spouse. Since new contributions are not available to be made to an inherited IRA, by making the contribution the survivor is signaling that it is now their own IRA account and no longer an inherited
3. Fail to Take an RMD: This is the most common way the election results, by failing to take an RMD that the survivor would otherwise be required to take as the designated beneficiary. Thus, with the failure to take an RMD, the survivor is deemed to have elected to treat the inherited IRA as their own.

Impact of Election on RMDs: With such an election, the survivor treats the inherited IRA as their own for RMD purposes for the year of the election and all subsequent years, with one exception. The RMD for the year of the IRA owner’s death is determined based on the survivor as the beneficiary, not the owner, even if the election is made in that year. [Proposed Regulation 1.408-8(c)(3).]

Example: Ben dies at age 75. Ben leaves his IRA to Jeri as the sole beneficiary. The balance of Ben’s IRA on December 31, the year of Ben’s death, was $100,000. Jeri turns age 73 in the year that follows the year of Ben’s death. Since Ben died after his required beginning date (RBD), April 1 of the year after Ben turned age 72, Ben was required to take an RMD. Using the Uniform Lifetime Table, based on age 75, Ben’s RMD for the year is $4,065. [$100,000 /24.6 = $4,065.]

Example: If Ben had already withdrawn his RMD amount for the year, Jeri does not have to take Ben’s RMD. If Jeri elects to treat Ben’s IRA as her own that year, e.g. she files an election with the IRA custodian, Jeri’s status as ‘owner’ will be effective immediately. That change in Jeri’s status  will be used to calculate Jeri’s RMD for the next year, and all subsequent years.

Example: If Ben had not withdrawn his RMD prior to his death, Jeri must withdraw the balance of Ben’s RMD by December 31 of that year. If Jeri fails to withdraw Ben’s last RMD amount, she will be deemed to have elected to treat Ben’s IRA as her own. That election will be effective to compute Jeri’s RMDs in the following year.  If Jeri does not elect in the year after Ben’s death to treat Ben’s IRA as her own (either affirmatively or via a deemed election) her RMD for the next year will initially be calculated based on Jeri being a beneficiary, determined using the Single Life Table. If the IRA grew from $100,000 to $105,000 Jeri’s RMD, as beneficiary, will be $6,731 [$105,000/ 15.6 = $6,731.] If Jeri elects in the second year to treat the IRA as her own, the RMD for the second year will change, because the election is immediately effective. In that case, Jeri then uses the Uniform Lifetime Table to calculate her RMD, where the factor used is 25.5 (not 15.6 in the Single Life Table.) Thus, Jeri’s RMD for year 2 is $4,118. [$105,000/ 25.5 = $4,118.]

Impact of Election on Trusts: If a trust is named as the beneficiary of the deceased spouse’s IRA, it cannot make the spousal election. This is the case even if under the required minimum distribution rules the survivor is deemed to be the sole beneficiary of the trust. [Proposed Regulations 1.408-8(d)(iii). Technically this is the correct result because a trust cannot own an IRA; it can only be a beneficiary of an IRA. Accordingly, a trust cannot elect to be the owner of an IRA. If Ben named his trust as the beneficiary of his IRA, his trust cannot make the election.