TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Level 2

Question

Inheriting spouse's IRA - I'm under 59 1/2 years old, accounts over 5 years

Forum|Forum|2 years ago
September 8, 2023
33 replies
176 views

Hi,

My husband unexpectedly passed away at age 72 this year and I'm wondering what I should do with his IRAs, both Traditioal and Roth.

As I said in the title,

I am under 59 1/2 years old. (52)

Husband's accounts(both TRA/ROTH) have met over 5 years old.

According to IRS RMD rule last year, he has started RMD last year for tax return 2022 already.

I am a non-citizen resident and may choose to go back to my home country before 59 or after(I don't know yet), therefore I may need to withdraw money from both his and my IRAs ,

I was thinking about cashing out all his IRA money, but then considering the penalty and/or taxes...I am re-considering.

I have explored all over on the internet on this.

1. I was looking at IRS https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary#:~:text=5%2Dyear%20rule%3A%20If%20a,end%20of%20that%205th%20year website and found this line...

"Death of account holder after 2020" , "after the required RMD beginning date", it says

"Keep as an inherited account"

Take distributions based on their own life expectancy, or

"Rollover the account into their own IRA"

while other expert pages say, "Roll over in your own name", or "Keep it as an inherited IRA as a beneficiary"+5-year distribution rule(or 10?), or "Cash all out"...

Why the differences?? what iare 5- year/10-year distribution rules...?

2. If I choose to treat his TRA/ROTH as "Inherited IRAs as a beneficiary(not as my own)", I need to distribute certain amount of money according to "my life-expectancy table", and from ROTH as well as TRA accounts, am I correct?

3. What is "earnings"? Is earning the amount that's gained in the IRA accounts over the years with bank interest or through investment , am I correct?

Then , since I am under 59 1/2, when I do RMD gradually from inherited IRAs, will the distributed amount over his base contributed amount be subject to tax if I have distributed all money out of the inherited IRAs within the next couple of years before I reach 59 1/2 ?

4. Am I subject to 10% early withdrawal penalty for being under age 59 1/2?

Next year, I still can file jointly for 2023, but after that, it'll be single filing. I hear single filing is higher in taxable range...but still yet, my household income will drop, which is why I think it's better not to cash out this year (although total amount from his IRAs are not that much...). Am I thinking correct??

I am sooo overwhelmed by so much pressure with all the things I need to take care, so many questions.

Thank you in advance.

NCperson

Level 15

@tealover753 - one question as it will help others that respond.

You state your husband died this year, but was 72 years old and began his RMD last year. But beginning 1/1/23, the rules changed and RMD wasn't required until turning 73 years old. Can you please state his date of birth (or at least his birth year)? - that will end any potential confusion in reponses by others. While he may have taken a distribution last year, it may not have been a RMD but then again it may have been - it depends on when he turned 72.

fanfare

Level 15

" passed away at age 72 this year "

If he was 72 on his birthday last year, the RMDs have begun.

Sincxe his last date to take the first RMD is April 1 2023.you must take his first RMD of 2022 if he did not already take it, in which case you will have to ask IRS for a penalty waiver since it is after April 1.

If he was 72 on his birthday this year, there is no RMD.

@dmertzdoes the 10-year liquidation rule apply to a surviving spouse who maintains an Inherited IRA of their spouse? The rules are so complicated I can't figure it out.

tealover753Author

Level 2

Hi everyone,

Thank you for your responses!

So, yes, my husband turned 72 late last year(1950) and started RMD at the end of December 22. Passed away on April 20th 23. He would have been 73 this November.

Therefore, no 10year or even 5year rules, and

If I choose inherited TRA IRA route, I will need to start distribution(single life expectancy table) by the end of this year, I cannot wait until 12/31 of the year 2024 to decide what to do, correct?

Cash out option: If I choose to cash out TRA IRA or ROTH, no 10% penalty for being under 59 1/2 , correct?

I find there are two kinds of inherited IRA,

one is Inherited IRA(maintain as a beneficiary) the other is Assuming IRA(treat it as my own).

I went to our bank to discuss my route , the branch manager had contacted their legal team,

and their answer was,

I have only two options, which are

Cash IRA(s) or

Roll over in my name (Assuming IRA as my own) - cannot distribute money until 59 1/2 without penalty.

Rolling over in this case means Spousal transfer, which treats it as my own IRA.

and kept telling me that they need to close his TRA/ROTH IRA accounts, upon which they automatically become an Inherited IRA ... which I didn't understand why they don't know about Inherited IRA which allows me to withdraw upon Life expectancy method.

NCperson

Level 15

@tealover753 - a lot to unpack here......

@dmertz

I think the way this works is that since your husband passed with a 2023 RMD requirement, that RMD has to occur based on his RMD calculation and must occur if it did not occur prior to his passing.

@dmertz stated: "However, if your husband reached age 72 in 2022 and died on or after April 1, 2023, you must complete your husband's 2023 RMD if he had not already done so." What I beleive is inferred is that statement is the RMD was "locked in" based on HIS 12/31/22 balance and HIS divisor (26.5 at age 73). Your begin with your divisor in 2024.

tealover753Author

Level 2

Thank you all.

I still have questions….

[2023]

Traditional IRA - Husband’s RMD must be done by 12/31/2023 (Last RMD for him) and his account needs to be closed.

Assume ownership(Spousal Transfer) , or 2. Open Inherit IRA(Stretch IRA) , or 3. Cash out

If I choose #2 Inherited IRA and start RMD for both TRA/ROTH, I have to start RMD based on my own life expectancy(no 10-year method), but…, BY WHEN? because I found these three explanations as below…

to Start beneficiary RMD

by December 31 of the year following the decedent’s passing, or
until the year the decedent would have turned 73*

whichever is later .... So, Does this really mean , like dmertz said, I can start RMD from 2024?

othewise I need to do two separate RMD, one for my husband and for mine for Inherited TRA IRA and one another for my RMD this year...

Also there was a site that said,

By the DATE the original owner would have turned 73” (?)

Then when I reach 59 1/2, I can take ownership to take out whatever left together with the earnings portion.

ROTH IRA

There is no RMD requirement, or 10% early withdrawal penalty but tax on earnings before 59 1/2.

Am I correct , since my husband’s Roth is over 5 years and he was 72,

whether Assuming or Inherit Roth IRA, I can begin to take out up to contributed amount based on Single Life Expectancy table until I reach 59 1/2, but not touch the earnings until then to avoid being taxed. *I don’t intend to make contributions.

Then when I reach 59 1/2, I can take ownership to take out whatever left together with the earnings portion.

or To cash out, there would be instant tax on any earnings before 59 1/2.

AND To be treated as a beneficiary(inherit), the spouse must take RMDs. If no RMD is taken before the end of the year following the account owner’s death, the account will be deemed to be rolled over to the spouse’s own IRA

With my bank's situation, I should send the manager the link or explanation of inherited ira option to send to their legal team... but I wonder if they can let me take that option...

Thank you very much

dmertz

Level 15

As an EDB maintaining the traditional IRA as an inherited IRA, your annual beneficiary RMDs will begin with 2024 and that first beneficiary RMD will have to be completed by December 31, 2024. Completing your husband's 2023 RMD, while being paid to you as beneficiary, is not a beneficiary RMD, it's his RMD. The change to age 73 does not apply because that change only applies to those IRA participants reaching age 72 after 2022. Even if the change to age 73 did apply, that wouldn't change the fact that your beneficiary RMDs begin in 2024, the year after he would have reached age 73. If you choose to treat the IRA as your own, you will not have any RMDs until the year you reach age 75 (the RMD age changes to 75 in 2033).

Regarding the Roth IRA, if you treat the Roth IRA as your own, at any time you can take out any amount up to the amount of his contributions without tax or penalty. If you maintain the Roth IRA as an inherited Roth IRA for you as beneficiary you can take out any amounts (including cashing out the entire amount) without tax or penalty at any time. If you maintain the Roth IRA as inherited you'll have the choice to take annual RMDs as an EDB or you can opt into the 10-year rule with no annual RMDs. If you opt into the 10-year rule, when you reach age 59½ (which will be prior to 2033) you can assume ownership so that you will not have to take a distribution of the entire amount in 2033.

Regardless of what you do, make SURE that any movement of funds between traditional IRA accounts or between Roth IRA accounts is done by nonreportable trustee-to-trustee transfer, NOT by distribution and rollover.

tealover753Author

Level 2

Thank you dimetz,

>Regardless of what you do, make SURE that any movement of funds between traditional IRA accounts or between Roth IRA accounts is done by nonreportable trustee-to-trustee transfer, NOT by distribution and rollover.

So, this nonreportable trustee-to-trustee transfer....

Doesn't this apply when I transfer husband's IRA to "another financial institurion"?

Does this apply to me setting up my own(assuming IRA) or inheriting IRA within my bank whichever I decide?

dmertz

Level 15

The transfer can be within the same financial institution or to a different financial institution and is functionally the same in that the funds are moved directly from one account to another without any payment of funds to you personally.

It's not uncommon for bank personnel to mistakenly believe that any movement of funds out of a particular IRA account is a distribution, so you want to be wary of anything that suggests that the movement of funds involves a reportable distribution. Every time dealt with an inherited IRA held by a bank custodian I've had to educate them on the difference so that they would not mistakenly report a distribution. (Many banks use standardized forms provided by the firm Ascensus. These forms have separate boxes for transfers and for distributions. If this is the form that is used, make sure that it is marked to indicate a transfer, not distribution. bank personnel tend to have a bad habit of always marking the distribution box.)

tealover753Author

Level 2

Thank you.

Sorry,,,

So the inherited IRA which I am planning, and will begin RMD from next year , it is not considered distribution to me?

Which case will be reportable transfer...? between TRA to/from ROTH...?

Can I change to make inherited IRA to Assumed IRA before 59 1/2 if I changed my mind?

dmertz

Level 15

Repeating what I said earlier:

You must complete his 2023 RMD for the traditional IRA. The deadline to complete his 2023 is December 31, 2023, but you get an automatic waiver of the excess accumulation penalty if you complete it after 2023 but by the due date, including extensions, of your 2023 tax return.

Regarding beneficiary RMDs from the inherited traditional IRA, your first beneficiary RMD is for 2024. The deadline to complete that RMD is December 31, 2024.

Regarding the Roth IRA, it usually makes sense to treat the inherited IRA as your own so that you will not have any RMDs. If you instead choose to treat it as an inherited Roth IRA so that you have tax-free access to earnings before age 59½, you would have annual RMDs as an eligible designated beneficiary.

You can assume ownership up until the year you reach age 75. (The proposed rules say age 72, but those were written before the SECURE 2.0 Act changed the beginning RMD age, in your case, to age 75.) After that you can move the funds to your own IRA by distribution and rollover, subject to the one-rollover-per-12-months limitation. There is no reason not to assume ownership once you reach age 59½ because the only reason to maintain the account as inherited is to have penalty-free access to taxable amounts and the 10% early-distribution penalty disappears from your owned IRAs once you reach age 59½. Seep proposed regulation 1.408-8(c):

https://www.federalregister.gov/documents/2022/02/24/2022-02522/required-minimum-distributions

tealover753Author

Level 2

Thank you very much dmertz and Opus 17

I understand that , whether inherited or assumed, I must complete his RMD by the end of this year first.

Now, both my husband and I have IRAs in two different financial institutions, one is local bank as I mentioned earlier that we started off and another one is investment company.

Is it possible if I decide to do somthing like...

Inherited TRA IRA(start beneficiary RMD from 2024) and Assumed ROTH(take out any amount at any time without penalty or tax but leave the earned amount) with the BANK, and

Assumed TRA IRA(contribute/invest if I can/want to or leave as is until 59 1/2) and Assumed ROTH with the investment firm ?

OR like

Inherited TRA IRA with both institutions for now and maybe in 2025 change either or both to Assumed IRA ?

or is it considered One TRA and/or One ROTH even if spreaded in multiple institutions?

Thank you

*I'm not planning a conversion between iras

dmertz

Level 15

With respect to assuming ownership or maintaining as inherited, each account is treated separately.

Opus 17

Level 15

@dmertz wrote:

With respect to assuming ownership or maintaining as inherited, each account is treated separately.

Can you clarify this? I'm pretty sure that when my mother died, her (tradiational) IRA was rolled over/transferred into my father's IRA so he has one account, not two. Am I misunderstanding your comment?

tealover753Author

Level 2

Thank you @dmertz,

So, I went to the bank to set up an Inherited IRA i(nstead of Assumed IRA),

and explained to the manager that 'I need to do the last RMD for my deceased husband for this year'.

HOWEVER, the bank's IRA department kept saying that his RMD is now 'suspended' and

there WON'T be distribution requirement....

In other words, they won't do his RMD for this year. *They asked me what day he passed away which was after 4/1/23 and etc...

I wanted to process my husband's last (TRA)RMD for 2023 by 2/3 portion from the local bank and 1/3 from the other institution, but the local bank doesn't seem to agree.

Then my only option would be to process 100% RMD with the other institution...

With the other financial institution we've had IRA , the rep told me that I have to do RMD one last time for my husband, which I confirmed also on this thread too.

I don't know why the difference?

dmertz

Level 15

"HOWEVER, the bank's IRA department kept saying that his RMD is now 'suspended' and

there WON'T be distribution requirement.... "

Apparently they think that he reached age 72 in 2023, not in 2022, they think he died in 2022 (in which case you would have a beneficiary RMD for 2023) or they are simply confused. (Unfortunately, it's quite common for bank personnel to be inadequately trained with regard to inherited IRAs.) Because your husband reached age 72 in 2022 and died in 2023, you are indeed required to complete your husband's 2023 RMD. "Suspension" of this RMD is not permitted.

[Edit: After reading Opus 17's post below, I'm wondering if the bank might just be saying that they cannot issue an RMD paid to your husband and that any standing instructions to do so have been suspended. However, you must still complete his 2023 RMD with a distribution paid to you.]

They cannot refuse your request for a distribution. You are permitted to take a distribution whether they think it's an RMD or not. It's your responsibility, not the IRA custodian's responsibility, to satisfy RMD requirements.

Sine you inherited both accounts from the same decedent, you can take the combined RMD from these inherited IRAs in any combination.

Opus 17

Level 15

@tealover753

Let's clarify that your husband can't take an RMD, nor can the bank pay an RMD in your husband's name.

What happens is that you withdraw money in your name, and you get the 1099-R and you report the income on your tax return. The difference is that for 2023, the minimum amount you must withdraw is the amount your husband would have been required to withdraw as his RMD. Calculated using his age, life expectancy, account balance and so on. (You can always withdraw more, of course, if you want to spend it, give it away, or invest it some place else.)

Then starting in 2024, your need to withdraw an RMD (or not) will depend on your age, life expectancy, and other rules that apply to you.

To try and simplify even further, for 2023, you withdraw in your name, but the amount is calculated based on what your husband's RMD would have been. For 2024 and the future, you withdraw amounts based on your own RMD calculations.

Also, to remind you if things got confusing, an RMD is the required minimum amount you must withdraw, because you can't leave retirement funds untouched forever. You can always withdraw more if you want. The RMD is an amount, not a specific transaction. Suppose the RMD is $5000. That can be satisfied by a single withdrawal of $5000 on December 29, but it would also be satisfied if you withdrew $500 per month over the whole year for living expenses (because $500 x 12 is more than the $5000 minimum amount).

So for 2023, you need to withdraw an amount equal or more than your husband's RMD would have been. The withdrawal is in your name and goes on your taxes. The bank doesn't need to know that this is an RMD, they don't care or need to know why you are withdrawing money. A better bank or broker will help you calculate the RMD, but if you can calculate it on your own, all you need to do is withdraw that amount (or more).

tealover753Author

Level 2

Thank you @dmertz. @Opus 17 and everyone,

Yes, so I am tired of dealing with my bank, and I'm going to do my husband's Traditional IRA RMD from the other financial institution.

Now, regarding the my RMD for both TRA and ROTH Inherited IRAs (not Assumed or rollover), I found these below in IRS website.

Death of the account holder occurred in 2020 or later

Spousal beneficiary options

If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:

Keep as an inherited account
- Delay beginning distributions until the employee would have turned 72
- Take distributions based on their own life expectancy
- Follow the 10-year rule
Roll over the account into their own IRA

If the account holder's death occurred after the required beginning date, the spouse beneficiary may:

Keep as an inherited account
- Take distributions based on their own life expectancy, or
Rollover the account into their own IRA

Inherited Roth IRAs

Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

So, my understanding is...

I am not subject to the 10-year window RMD requirement, *since my husband's death occurred this year

I am subject to the same RMD requirement for inherited Roth IRA as Tra IRA, and earnings portions are also not subj to tax because the Roth accounts are more than 5 years old

am I correct?

I was told by a rep from the other institution that I would need to complete the RMD within 10 years...

In any case, whether I am subject to 10-year rule or not, I only have a few more years until 59 1/2 yo.

But if I am NOT, then can I still leave somewhat amountand keep RMD over 10 years period in the inherited IRA accounts ? *Just curious...

Thank you

Opus 17

Level 15

@tealover753

I will try to answer in general.

You have two main options.

A. Keep the account as an inherited IRA.

B. Assume ownership in your own name, by taking over the account in your own name or rolling over the funds into your own IRA accounts.

If you keep the account as an inherited IRA, you do not have to close the account in 10 years. But you must begin taking RMDs NOW based on your life expectancy. (You can always withdraw more if you need to, but you must withdraw at least the minimum amount.) Your withdrawals are not subject to the 10% penalty for early withdrawal even if you are under age 59-1/2, but withdrawals from the traditional IRA are taxable.

If you rollover the account into your own IRA, then you are subject to the ordinary rules that apply to your own IRAs, including the 10% penalty for early withdrawal, but also RMDs not being required until you reach age 75 (which is what the beginning year will be by the time you reach that age). Also note that your own Roth IRA never has an RMD, but an inherited Roth IRA does.

Also remember that you must first take your husband's RMD for 2023. Then, if you decide to keep the IRA as an inherited IRA, you must start taking RMDs based on your own life expectancy starting in 2024. That also means that you must decide whether to leave the IRA as an inherited IRA or to assume ownership in your own name by the end of 2024. If you fail to take the RMD for 2024, then by default you have chosen to assume ownership in your own name.

----------

So what you do depends on your need for the money and your financial philosophy. If you don't need the money for living costs, and you want to keep your retirement assets to grow to their maximum potential, then you want to assume ownership in your own name. That means you will pay a penalty if you withdraw before age 59-1/2, but it also means you won't be forced to withdraw money until age 75. On the other hand, if you need the money now, you may want to keep the funds as an inherited IRA so you don't pay a penalty on your current withdrawals, but the down side is that you must keep making withdrawals for the rest of your life, even if you wanted to leave it alone, you can't.

You also have the option of rolling over the traditional account in your name and keeping the Roth as an inherited account, or vice versa. Remember that a Roth IRA in your own name never has an RMD, even after age 75, but an inherited Roth IRA does have an RMD.

Really, the key question is, do you need to spend some of that money before age 59-1/2?

tealover753Author

Level 2

Thank you @Opus 17 and @dmertz

Completed my husband's last RMD the other day.

Will start my spousal beneficiary RMD for the Inherited IRA for both Inherited TRA&ROTH IRA from 2024 and

if I keep the IRAs as Inherited as a beneficiary, then empty the inherited accounts by the 10th year(2033),

unless I decide to roll over them(or some/one of them) to Assumed Ira along the way.

Thank you so much for your help!

Opus 17

Level 15

@tealover753 wrote:

if I keep the IRAs as Inherited as a beneficiary, then empty the inherited accounts by the 10th year(2033),

unless I decide to roll over them(or some/one of them) to Assumed Ira along the way.

Not quite. If I understand correctly, because you are a qualified beneficiary (a spouse), if you keep the IRA as an inherited IRA, you may withdraw over your expected lifetime. You are not required to follow the 10 year rule unless you choose to for your own reasons.

Also, I don't know how long you have to assume ownership in your own name (by assumption or rollover). In publication 590-b, I see a rule that if you make contributions to the inherited IRA, that action changes ownership of the IRA from a beneficiary account to your own account. And if you fail to take an RMD as beneficiary (in 2024 or later), then the IRA becomes your own IRA and you no longer follow the beneficiary rules. But I don't know if there are any other time limits on assuming ownership.