RMD Required In Order for Surviving Spouse to Assume IRA When Decedent

[Guest lynne wakefield]

Assume Mr. X reaches age 70 1/2 in 2001, and dies in February 2002 (before taking the 2001 Required Minimum Distribution from his IRA, which was due April 1, 2002). His spouse, Mrs. X, is his designated beneficiary, and she will be 70 1/2 in 2003.

The proposed Regs. in Section 1.401(a)(9)-3 make it clear that Mr. X's IRS beneficiary is not required to take a RMD for 2001 because he died before his first required distribution date. A post-death distribution is due by December 31, 2003 (the end of the year after the year of death), and then that distribution will be calculated using his wife's life expectancy in 2003.

However, it is less clear about what is required if Mrs. X assumes ownership of her deceased husband's IRA. Proposed Reg. section 1.408-8 Q&A 5 provides that Mrs. X may assume her deceased spouse's IRA, but that the election to assume the IRA "is permitted to be made at any time after the distribution of the required minimum amount for the account for the calendar year containing the individual's date of death". The preamble to the proposed Regs. states that this sentence "make(s) the election consistent with the underlying premise that the surviving spouse could have received a distribution of the entire decedent IRA owner's account and rolled it over to an IRA established in the surviving spouse's own name as IRA owner." The preamble also describes the regulation as mandating the distribution of the "required minimum amount (if any)" due for that year - this recognizes that there may be no minimum distribution required before transfer. The question is, in these circumstances, what is that "required minimum amount (if any)" which must be distributed if Mrs. X wishes to transfer ownership in 2002?

If the assumption of an IRA is meant to be consistent with what would have happenned if Mr. X, prior to death, had directed a distribution of everything from his IRA, then under proposed Reg. section 1.401(a)(9)-7 Q&A 3, Mrs. X would need to take a distribution of Mr. X's 2001 and 2002 RMDs before she can assume the IRA, which is a worse situation than if she had not assumed the IRA.

Therefore, it seems that the better reasoned answer is that the determination of whether a RMD is required for the year of death is based on whether Mrs. X's assumption occurred before 2003 - if the assumption occurred in 2002, no RMD would have been due in the "year of death" because proposed Reg. section 1.401(a)(9)-3 Q&A 3(B) provides that the first post-death distribution is not due until 2003. In other words, the phrase requiring that the spouse may assume the IRA only after the "RMD for the year of death, if any, is made" only applies to an IRA owner who dies after his initial Required Minimum Distribution Date. For Mrs. X, no RMDs need be made in 2001 or 2002 (because Mr. X died before his first RMD date). Thus, assuming Mrs. X assumes the IRA in 2002, Mrs. X need not take her first RMD from the IRA until her personal RMD Date based on when she attains age 70 1/2 (i.e., April 1, 2004).

[mbozek]

Since the IRA owner died prior to April 1 when the RMD is required to be paid he never commenced benefits and the spouse can rollover the IRA to her own IRA without taking an distribution until April 1 of year following the year in which she turns 70 1/2.

[BPickerCPA]

There is confusion in the regs between (in the IRS' view) the required beginning date and the date that the obligation to make a required distribution accrues.

My comment letter on the proposed regs asked the IRS to clarify the answer to this question, so hopefully the final regs, due out soon, will give a more definitive answer.

It appears from different readings and conversations with IRS personnel that the obligation to take a minimum required distribution accrues at the beginning of the year that the taxpayer will attain age 70½. So even though the distribution need not be taken until the following 4/1, there is an obligation to make a minimum distribution. This can be deduced also from the fact that a Roth conversion cannot be made in the year a taxpayer attains age 70½ until after the MRD is taken (Roth regs).

I personally disagree with the above; but I believe it to be the IRS position.

In your situation, even though the taxpayer died prior to his required beginning date, the spouse would still need to take the year 2001 MRD prior to 4/1/02. In addition, she would have to take the year 2002 MRD prior to taking the IRA as her own.

Like I said, I think the rule SHOULD BE like mbozek stated it. But I don't believe it is, according to the IRS.

[mbozek]

Barry: I I guess I don't see the problem because the IRS reg 1.401(a)(9)-3 A-1 ,provides that if the owner dies before the Required Beginning Date then the entire interest of the owner must be distributed to the beneficary under either the 5 yr rule or over the benficiary's life. There is no qualification (such as "except for the MRD in the year of death") which implies that any minimum required distribution is to be made for the year that the owner attained 70 1/2. A spouse beneficiary can roll over the entire amount to his or her own IRA. Any distributions made by the owner before death are considered voluntary withdrawals. I don't see anything in the regs about "accrual" of MRD in the yr that the owner turns 70 1/2 which mandates some form of taxable distribution if the owner dies before the RBD.

[Guest lynne wakefield]

Thank you both for you insight. After trying for several days, I was finally able to get in touch with the contact individual at the IRS responsible for the drafting of these regulations. She provided me with the following guidance regarding my scenario (subject to the usual disclaimers).

She informed me that since the IRA owner (Mr. X) died in January 2002, before his required beginning date, he is treated as having died before distibutions had begun. She also told me that even if he had voluntarily taken a withdrawal prior to his required beginning date, he would still be treated as having died before distribusions had begun.

As a result, he is not required to take a RMD. This takes care of the language in the preamble requiring a surviving spouse to take a RMD, if any, before electing to assume ownership of the IRA. Since there is no RMD, the spouse can assume ownership without taking a RMD for 2001 or 2002. Any future distributions from the IRA would begin upon her required beginning date, and distributed thereafter in accordance with her life expectancy.