RMD Dilemma: Death in the Age 70 1/2 Year

One of the most confusing situations in the complex world of required minimum distributions (RMDs) is what happens when an individual dies on or after Jan. 1 of the year in which he or she turns 70 1/2 but before his or her actual "required beginning date."

Question: My husband "Frank" (who was retired) died in July 2015. Had he lived, he would have turned age 70 1/2 in November of that year. He named me as sole beneficiary of his 401(k) plan at his former workplace and also of his traditional IRA. I want to roll these plans over to my own IRA so I can name our children as my designated beneficiaries. However, the 401(k) plan administrator is telling me I have to take out of the plan the RMDs Frank would have had to take for 2015 and 2016 (had he lived) before I can roll over the rest, and Frank's IRA provider is telling me the same thing about the IRA. But my IRA provider (the company that holds the IRA I plan to roll these funds into) says those other companies are both wrong. My IRA provider says I can roll the entire amount of both of Frank's accounts into my own IRA, then start taking RMDs based on me as the owner (I'm turning age 72 this year). I am confused! Who's right?

Answer: I give Frank's 401(k) administrator and IRA provider flunking grades. They are wrong on both counts. Your IRA provider does better--they got it partially correct!

Here's the background. Generally speaking it's true--the "age 70 1/2 year" is the first year for which a minimum distribution is required. Had Frank lived, he would have had to take distributions from both his 401(k) and his IRA for the year 2015, his age 70 1/2 year--even though he had the option to postpone those distributions until April 1, 2016. It's also generally true that if a participant dies during a "required distribution year" the beneficiary has to step in and take any portion of the RMD the participant failed to take.

However, in my opinion, death prior to the "required beginning date" simply erases any obligation that Frank had to take an RMD from any plan or account. He had no obligation to take any distribution until April 1, 2016, and because he died before his distribution-obligation kicked in, there is no "balance of the RMD" that the beneficiary has to take. How did I come to that conclusion? See "Where to Read More," below.

Because there was--retroactively--no RMD at all for the year 2015, you do not have to remove any funds from the account for a 2015 RMD.

Now we move on to the issue of 2016 RMDs. We have one answer for Frank's IRA and a different answer for his 401(k) plan.

The IRA Let's start with Frank's IRA. There is a special minimum distribution rule that applies to an IRA that is 100% payable to the surviving spouse as sole beneficiary. The surviving spouse can "elect to treat" this inherited account as the surviving spouse's own IRA. If you, as the surviving spouse, make that election in 2016 (by transferring the funds into your own IRA), then you are treated as the owner of the account for the entire 2016 year. In other words your election is retroactive to the beginning of 2016. So you will have to take an RMD from the account once it's rolled into your own IRA, but that RMD will be computed based on you as owner of the account, using the "Uniform Lifetime Table." It appears you would use Frank's Dec. 31, 2015, account balance to compute your 2016 RMD.

The 401(k) Plan With a 401(k) plan, the "spousal election" does not exist. Therefore you are simply holding an inherited 401(k) plan, as beneficiary. You do have the right to roll it over to your own IRA, but a minimum distribution has already accrued (based on you as beneficiary) for 2016. That distribution will be computed using the Single Life Table, which unfortunately is not quite as favorable to you as the Uniform Lifetime Table. So you have to withdraw that distribution first, then you can roll the rest of Frank's 401(k) account over to your own IRA. If you complete that rollover in 2016, your 2017 and later withdrawals will be based on the Uniform Lifetime Table with you as owner.

I've got to admit this is one of the most convoluted situations in the whole convoluted minimum distribution field, so I wouldn't be surprised if some plan administrators disagree with me. Remember, as the surviving spouse, if worse comes to worst, you can just take the distribution they are insisting you are required to take, then roll it over to your own IRA later if you are confident they distributed more than you were really required to take. That's not ideal. For one thing, you have to contend with the 60-day limit and the one IRA-to-IRA rollover per 12 months rule. For another thing, you may have to file an explanation with your tax return if the tax treatment you decide upon is not consistent with the plan administrator's 1099-R. But that may be the best way to resolve the conflict.

Where to read more: For the Uniform Lifetime and Single Life tables, see IRS Publication 590-B. For the conclusion that no distribution "to the participant" (or therefore to the beneficiary taking the balance of the participant's distribution) is required from any type of plan for the age 70 1/2 year, or age 71 1/2 year if the participant dies before his or her required beginning date, see Internal Revenue Code § 401(a)(9)(B)(I) and Treas. Regs. §§ 1.401(a)(9)-2, A-6; 1.401(a)(9)-3, A-1; 1.401(a)(9)-5, A-4(a); and 1.408-8, A-5(a). For conclusion that the spouse must take the year-after-death RMD as beneficiary before rolling over the plan balance to the spouse's own plan or IRA, see Treas. Reg. § 1.408-8, A-7.

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