Advanced Underwriting Consultants

Question of the Day – June 27

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My 55 year old client recently inherited an IRA account from her deceased spouse, who was 60 at the time of death.  What is her best stretch choic

Answer: A surviving spouse has the unique ability to treat an IRA balance as the surviving spouse’s own account—without a current income tax result.  This election may be made at any time after the account owner’s death.

The surviving spouse will be assumed to have made the spousal continuation election if the surviving spouse fails to take the RMDs associated with making another choice.

 

If spousal continuation is elected, the IRA is treated in all respects as if it is the IRA of the surviving spouse.  For example, if the surviving spouse elects spousal continuation, the required distribution rules will be applied with reference to the surviving spouse’s age.  If the time is prior to the surviving spouse’s RBD, no RMD is required.

Likewise, any pre-59 ½ distributions from the IRA are subject to the 10% penalty tax.

In the alternative, the surviving spouse may choose to treat the account as an inherited account.  If the deceased had not yet reached the RBD, the first RMD is not due until December 31 of the year the deceased spouse would have attained 70-1/2.

If the account is maintained as an inherited account by the surviving spouse, each year’s RMD for years after the deceased spouse would have attained age 70-1/2 is calculated by referring to the Uniform Lifetime Table using the surviving spouse’s actual age in that year.

Distributions from the inherited account are not subject to the 10% penalty tax, regardless of the surviving spouse’s age.

The right stretch approach depends on the facts and circumstances facing the surviving spouse at the time of the first spouse’s death.  In this example, if the surviving spouse is likely to need money from the IRA before she reaches 59 ½, choosing the inherited account option may be best.  If she is not likely to need the money, spousal continuation is probably the right choice.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.