Take-Away: Unlike other designated beneficiaries, a surviving spouse has a couple of options as to the source from which to take the deceased spouse’s year-of-death required minimum distribution (RMD.)

Background: A few weeks ago we covered the requirement for the designated beneficiary to take the deceased IRA owner’s ‘final’ RMD if he/she had not taken their RMD before their death. The ‘take-away’ was that the decedent’s estate does not report that ‘final’ RMD as part of the estate’s income for the year, nor is the RMD reported on the decedent’s final Form 1040. Rather, the designated beneficiary of the decedent’s IRA (or qualifed plan account) reports the ‘last’ RMD as part of his or her income for the calendar year.

Penalty: Recall that the failure to timely take an RMD results in a 50% excise tax. [IRC 4974(a); Regulation 54.4974-1.] That penalty is imposed on the ‘payee.’

Example: Don, a divorced retired dentist dies in early January, 2021. Don was age 72 at the time of his death, so he was required to take an RMD for 2021, which he had not taken prior to his death. Don owned a traditional IRA at the time of his death, for which he named his son, Don Junior (‘Junior’) as the sole designated beneficiary. Don’s IRA at the time of his death had a balance of $3.3 million, causing Don’s ‘last’ RMD to be $129,000. Junior mistakenly believes that his father’s ‘last’ RMD for 2021 will be reported on his late father’s 2021 Form 1040. Junior fails to take and report Don’s 2021 RMD on his own Form 1040 for 2021. Junior will incur an excise tax of $64,500 in addition to having to include the $129,000 RMD in Junior’s own income for the year.

Surviving Spouse as Designated Beneficiary: When the decedent’s designated beneficiary is the decedent’s spouse, he/she does not receive a ‘pass’ on taking the decedent’s ‘last’ RMD, even though the surviving spouse can rollover the decedent’s traditional IRA (or qualified plan account) to his or her own IRA.

Surviving Spouse Options: A surviving spouse who is a designated beneficiary does, though, have options that other non-spouse designated beneficiaries do not have with regard to the source of funds with which to take the decedent’s ‘last’ RMD. A surviving spouse who is a designated beneficiary can: (i) transfer the deceased spouse’s entire IRA to an IRA in the survivor’s own name and take the ‘last’ RMD from that account; (ii) treat the deceased spouse’s IRA as his or her own IRA and take the RMD from that account; or (iii) take the ‘last’ RMD from his or her own IRA account which was created and funded prior to the deceased spouse’s death. In short, all the IRS cares about is that the survivor takes the ‘last’ RMD, but it does not care what source is used for that ‘last’ RMD.

Example: Archie is the beneficiary of his wife Edith’s traditional  IRA. Edith dies in 2021 at age 79, without taking her RMD for the year. Archie does a spousal rollover by transferring Edith’s IRA funds to an IRA in Archie’s name alone. Later in 2021 Archie can take Edith’s year-of-death RMD from his own IRA account.

60-Day Rollover Exception: The only time when the deceased spouse’s IRA must be the source of the ‘last’ RMD taken by the surviving spouse is when the survivor takes a 60-day rollover of the decedent’s IRA. In that instance, the RMD must be paid from the deceased spouse’s IRA as a death distribution. This is due to the fact that an RMD is not eligible for a rollover, i.e. the first dollars ‘out’ of the retirement account when an RMD must be taken during the calendar year are the RMD dollars, which can never be rolled over.

Example: Using the prior example, if Archie had done a 60-day rollover using Edith’s IRA account, he would have had to take the ‘last’ RMD at that time before rolling over the balance of Edith’s IRA funds to the IRA established in Archie’s own name.

2020:  The CARES Act suspended all RMDs for 2020. Accordingly, this should not present a problem for surviving spouses whose spouse died in 2020, and who are wondering if they must take an RMD from the IRA that they inherited from their spouse. There is no ‘last’ RMD for 2020.

2021: Despite some wishful thinking by many, there has been no discussion in Congress, nor from the IRS, about suspending RMDs for 2021.

Conclusion: To avoid the 50% excise tax, the designated beneficiary of a decedent’s IRA must take their ‘last’ RMD if the decedent did not take it prior to his or her death. Unlike other designated beneficiaries, a surviving spouse has a few more options of the source from which to take that ‘last’ RMD,  i.e. the inherited IRA or their own IRA.