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

[tealover753]

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... 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]

@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]

" 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.

[dmertz]

It's also important to know if your husband died before April 1, 2023 which was his Required Beginning Date (RBD) for RMDs if he reached age 72 in 2022.

Don't be in a hurry to do anything with these inherited IRAs, you have until the end of 2024 to decide what to do.  Take the time to understand everything regarding your options and obligations.  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.  The regular deadline for taking that RMD is December 31, 2023, but you get an automatic extension to the due date of your 2023 tax return, including extensions, to complete that RMD without penalty.

1 and 2.  A spouse under age 59½ would usually keep the traditional IRA as an inherited IRA so that distributions from the inherited traditional IRA would be penalty-free if taken before reaching age 59½.  You as spouse beneficiary would be an Eligible Designated Beneficiary and be required to take distributions based on your single life expectancy.  However, if the deceased spouse died before their RBD, you can opt into the 10-year rule and avoid annual RMDs until 2033.  Anytime prior to 2033 you could assume ownership of the IRA and treat it as your own by trustee-to-trustee transferring the inherited IRA into your own.  Opting into the 10-year rule would make sense if you will be reaching age 59½ before 2033, which I understand to be the case, or, even if you would not reach age 59½ before 2033, you know that you will not need distributions from the inherited traditional IRA between January 1, 2033 and the date that you reach age 59½.  Regardless, of the above, when you know that you will not need to spend any more money from the traditional IRA, it would likely make sense to assume ownership of the traditional IRA to stop any beneficiary RMDs.  You will be treated as owner the entire year that you assume ownership.

3.  In almost all cases it makes sense for a spouse beneficiary to treat an inherited Roth IRA as the surviving spouse's own.  In your case the 5-year qualification period has been met, so you would only have to wait until age 59½ to take out earnings without tax and penalty.  Earnings come out last.  Contribution basis comes out first, free of tax and penalty.  Only if you expect to need to spend the earnings in the Roth IRA before you reach age 59½ might it make sense to leave the Roth IRA as an inherited Roth IRA so that any distribution will be free of tax and penalty.

4.  You are never subject to a 10% early-distribution penalty on distributions from an inherited IRA.  If you assume ownership of the IRA, any taxable amounts distributed to you before you reach age 59½would be subject to the 10% early-distribution penalty (absent any other penalty exception).

fanfare is right, things used to be so much simpler before the SECURE Act added so many complications.

[tealover753]

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]

@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.  

[dmertz]

Your husband died after his RBD, so you are correct, you are an Eligible Designated Beneficiary who, if you maintain the traditional IRAs as inherited does not use the 10-year rule and must take annual beneficiary RMDs beginning in 2024 (not 2023).  If your husband did not complete his 2023 RMD, you must complete his RMD.  As I said previously, 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.  The only reason to maintain the traditional IRA as an inherited IRA is to be able to take penalty-free distributions before age 59½, When you reach age 59½ (or before if you don't need the money for spending), you can assume ownership of the traditional IRA and RMDs will stop until the year you reach age 75.

Roth IRAs don't have an RBD, so if you maintain the Roth IRA as inherited you can opt into the 10-year rule for the Roth IRA or take annual RMDs based on your life expectancy.  Usually, though, it makes sense to just assume ownership of the Roth IRA and before age 59½ not take out any more than the contribution basis.

There is never a 10% early-distribution penalty on a distribution from an inherited IRA.

"their answer was, I have only two options, which are Cash them all  and Roll over in my name (Assuming IRA as my own) "

Unless their particular IRA agreement explicitly prohibits transferring these to inherited IRAs for your benefit, which is extremely doubtful, nothing prevents you from doing so and their legal department is wrong.  This sounds like they are simply trying to discourage you from maintaining inherited traditional and Roth IRAs because they don't want to deal with it.    Movement to an inherited IRA for your benefit must be done by  nonreportable trustee-to-trustee transfer; it is not permitted to be done by reportable distribution and rollover.  Also, if you move both the traditional and Roth IRAs to traditional and Roth IRAs to your own, at least one (and preferably both) must be done by trustee-to-trustee transfer.  Only one can be moved by reportable distribution and rollover without violating the one-rollover-per-12-months limitation.

Be aware that banks are notoriously inept at dealing with inherited IRAs, particularly with understanding the distinction between a nonreportable trustee-to-trustee transfer (which can be within the same trustee or to a different trustee and is always the preferred method of moving an IRA) and a distribution and rollover.  Every time I've had to deal with inheriting an IRA held by a bank I've had to educate them and until they corrected the forms refuse to sign any that indicated that I was receiving a reportable distribution when the intent was to maintain an inherited IRA.  I've even had to force one to use the correct third-party IRA agreement when establishing the inherited IRA when they tried to use the third-party agreement for an owned IRA.  (Many banks purchase IRA forms and standard agreements from a third party, one major third-party provider in particular.)

[tealover753]

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.

1. 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

1. by December 31 of the year following the decedent’s passing, or
2. 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,

1. 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]

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.

[tealover753]

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]

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.)

[tealover753]

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]

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

[Opus 17]

---

@tealover753 wrote:

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?

---

You have the option of keeping the inherited IRA as an inherited IRA (it will be titled something like "Jane Doe as beneficiary of John Doe") or of assuming full ownership (it becomes "Jane Doe's IRA").

If you want to keep the IRA as an inherited IRA, you need to start taking RMDs now (in 2023).  Technically, the 2023 RMD is the one your spouse was required to take, and will be calculated according to his life expectancy.  This is still a distribution to you and is taxable income to you, but there is no 10% penalty for early withdrawal even if you are under age 59-1/2.  Starting in 2024, you take beneficiary RMDs calculated according to your life expectancy and the rules for beneficiary RMDs.  

If you want to assume full ownership of the IRA by transferring it from an inherited IRA to your own IRA, you must first take your spouse's 2023 RMD (which is taxable to you).  Then you can transfer ownership of the remaining balance to your name. 

A direct transfer from an inherited IRA to your own IRA should not be reported.  (Even if it is reported by mistake, it won't be taxable.  If you assume ownership of a traditional IRA, that's not reportable, and if you assume ownership of a Roth IRA, that's not reportable.  However, you mentioned a traditional IRA to Roth IRA.  That's a taxable conversion (pre-tax IRA to Roth IRA is always a taxable conversion) and of course must be reported, although there is no 10% penalty for early withdrawal. 

[tealover753]

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