Two Accounts, Same Amounts, but Different RMDs for Surviving Spouse

Question: Husband "Mike" died in 2015 at age 81, owning an IRA and a 403(b) account. Each account was worth $100,000 on Dec. 31, 2015.

Mike had already taken his 2015 required minimum distributions (RMDs) from both accounts prior to his death. Wife "Betsy" (who survived him and is still living) was named as sole beneficiary of both accounts. She turns 80 this year (2016). Betsy wants to roll or transfer both of these inherited accounts into her own IRA. She understands that, beginning in 2017, she will be taking RMDs from her IRA that are based on the new larger balance due to these rollovers.

The question we can't figure out is, what is Betsy's RMD from the two inherited accounts for 2016? She plans to take the 2016 RMD from each account before rolling or transferring the rest of the funds into her own IRA. But the 403(b) plan provider and the IRA provider are giving her different 2016 RMD amounts. How can that be, when both accounts are the same value with the same decedent and the same beneficiary? Help!

Answer: It appears that the two account administrators are on the right track. Strangely enough, when the surviving spouse is sole beneficiary and wants to roll the inherited accounts into her own IRA, and we are past the end of the year of the participant's death, the IRS seems to provide different methods of computing the RMD to the surviving spouse from an inherited account for the year of the rollover depending on whether the account is an IRA or some other type of retirement plan!

IRAs: The Spousal Election Let's start with the IRA. IRAs have a unique "minimum distribution rule" for surviving spouses. Although the Tax Code itself says only that the surviving spouse (unlike other beneficiaries) can "roll over" distributions made to her from the IRA of a deceased spouse, the IRS regulations go further. The IRS regulations say that if the surviving spouse is sole beneficiary of the IRA, the surviving spouse can elect "to treat the spouse's entire interest as a beneficiary in an individual's IRA... as the spouse's own IRA."

The spouse can make that election any time after the participant's death. The election does not affect the RMD for the actual year of the participant's death--that, as always, continues to be whatever the RMD was that the decedent was supposed to take in that year based on his age in that year. Subject to that exception, however, "If the surviving spouse makes the election, the required minimum distribution for the calendar year of the election and each subsequent calendar year is determined under section 401(a)(9)(A) with the spouse as IRA owner and not section 401(a)(9)(B) with the surviving spouse as the deceased IRA owner's beneficiary." (Emphasis added.)

In other words, if Betsy elects to treat Mike's IRA as "her own" IRA for 2016, her 2016 RMD will be determined using the Uniform Lifetime Table based on her age in 2016, just the same as the 2016 RMD is determined for the IRAs she already owns. She is treated as the IRA "owner" or "participant" retroactively for the whole year. Her Uniform Lifetime Table factor for 2016 based on her turning age 80 this year is 18.7. $100,000 divided by 18.7 indicates an RMD of $5,347.60 for 2016 that she should take out of Mike's IRA before rolling the rest into her existing IRA.

Non-IRA Plans Turning to the 403(b) account, we find a different answer. There is no special provision, as there is for IRAs, allowing the surviving spouse to elect to treat an inherited 403(b) plan (or any other non-IRA retirement plan or account) as the surviving spouse's own account.

That means the surviving spouse's RMD for the year she rolls over the inherited 403(b) account will be determined based on her being the beneficiary of the account, not the owner of the account. As beneficiary, she is required to take an RMD for the year after the year of death based on her own single life expectancy based on her age on her birthday in the year after the year of death. Betsy turns 80 in 2016 (the year after the year of Mike's death). Using the IRS' Single Life Table, for age 80 the Applicable Distribution Period (divisor) is 10.2.

So Betsy's RMD for 2016 from the 403(b) plan is $100,000 divided by 10.2, which equals $9,803.92--almost twice as large as the RMD from Mike's IRA!

As surviving spouse, she still gets special deals other beneficiaries don't get. For example, if Mike had died before reaching age 70 1/2, Betsy could hold the IRA as beneficiary without taking any RMDs until he would have reached age 70 1/2--other beneficiaries don't get that privilege. Also, if Betsy continued to hold the account as beneficiary, she would have her life expectancy recalculated (extending it slightly) every year, another deal other beneficiaries don't get. And of course she gets the best deal of all, which is the ability to roll the account over to her own IRA.

But until she does that rollover, and including in the year of the rollover itself, she's "just another beneficiary," pretty much, with regard to computing her RMD from the inherited non-IRA account.

Where to read more: See Internal Revenue Code (IRC) § 408(d)(3)(C). For rule making election retroactive to beginning of the election year (except in the year of death), see Treas. Reg. § 1.408-8, A-5(a). For different rule regarding inherited 403(b) account, see Treas. Reg. § 1.403(b)-6(e)(4). For discussion of the spousal rollover and election, see Chapter 3 of Natalie Choate's book Life and Death Planning for Retirement Benefits (7th ed. 2011) (http://www.ataxplan.com).

Natalie Choate will be speaking at a location near you if you live in Madison (Oct. 17, 2016) or Elkhart Lake (Oct. 18, 2016), Wis.; South Bend, Ind. (Oct. 27, 2016); Santa Fe, N.M. (Nov. 10, 2016); Scottsdale, Ariz. (Nov. 11, 2016); Memphis, Tenn., (Dec. 7, 2016); Little Rock, Ark. (Feb. 16, 2017); Manhattan Beach, Calif. (April 28, 2017); Asheville, N.C. (May 4, 2017); Augusta, Maine (May 5, 2017); or Waltham, Mass. (June 2, 2017). See all of Natalie's upcoming speaking events at http://www.ataxplan.com/seminars/schedule.cfm.