Understanding Retirement Plan Assets – Options for Surviving Spouses

Trillions of dollars have been invested in individual retirement plans (IRAs) and qualified retirement plans (QRPs), such as 401(k) plans and 403(b) plans. These retirement assets comprise a substantial portion of the net worth of many middle-class and upper-class families. These assets often pass at death based upon beneficiary designation or the terms of a QRP, rather than passing under a will or trust. Our Firm frequently advises surviving spouses on their options with regards to a deceased spouse’s assets in order to ensure that the surviving spouse’s needs are met while minimizing the income tax burden associated with the distribution of assets from these tax-deferred accounts.

Generally speaking, the following questions should be asked and answered to ascertain a surviving spouse’s options with respect to their deceased spouse’s retirement assets:

  1. Did the deceased spouse die before, on or after his or her Required Beginning Date (“RBD”) for making Minimum Required Distributions (“MRDs”)? To answer this inquiry one must first determine the date on which the RBD falls.

A.  RBD for Traditional IRA. The RBD for Traditional IRAs is April 1st of the year after the year in which the owner turns 70.5. By way of example, if the deceased spouse’s 70th birthday was August 1, 2014, they turned 70.5 years of age on February 1, 2015, and their RBD was April 1, 2016. SEP and SIMPLE IRAs are treated the same as Traditional IRAs for purposes of calculating the RBD of the deceased owner.

B.  RBD for ROTH IRA. There is no RBD for ROTH IRAs – therefore, the deceased spouse is always treated as having passed away before his or her RBD.

C.  RBD for Qualified Retirement Plan- 5% or Less Owner. With respect to a Qualified Retirement Plan (“QRP”) sponsored by an employer in which the deceased spouse owned 5% or less, the RBD is the later of:

(i) April 1st of the year after the year in which the deceased spouse turned 70.5; or

(ii) April 1st of the year after the deceased spouse retired.

D.  RBD for QRP- Greater than 5% Owner. With respect to a QRP sponsored by an employer in which the deceased spouse owned more than 5%, the RBD is April 1st of the year after the year in which the deceased spouse turned 70.5.

  1. What are a surviving spouse’s options, and the associated implications, if the deceased spouse died before his or her RBD?

A.  Option 1: Spousal Rollover. The surviving spouse may rollover the deceased spouse’s IRA assets to the surviving spouse’s own IRA. If the decedent’s IRA has multiple beneficiaries, the surviving spouse may rollover his or her respective portion of the decedent’s IRA. The surviving spouse may then defer MRDs, and the associated income tax liability, until the surviving spouse’s own RBD. The primary disadvantage of a spousal rollover is a potential 10% penalty if the surviving spouse receives a distribution prior to turning 59.5 years of age.

B.  Option 2: Inherited IRA. The surviving spouse may elect to treat the deceased spouse’s IRA as an inherited IRA. In this case the surviving spouse should take MRDs over his or her remaining life expectancy. The surviving spouse’s first MRD must be taken by the later of (i) December 31 of the year after the deceased spouse passed away or (ii) December 31 of the year the deceased spouse would have turned 70.5. While the latter option is particularly attractive for a surviving spouse who is older than the deceased spouse, consideration should be given to the surviving spouse’s health, as the designated beneficiary of the surviving spouse’s inherited IRA must use the surviving spouse’s life expectancy and applicable divisor when determining MRDs after the surviving spouse’s death.

C.  Note regarding QRP Assets. While many QRPs include a Rollover IRA option and Inherited IRA option, the QRP’s governance documents will set forth the surviving spouse’s options with respect to the deceased spouse’s retirement assets. Thus, one should closely review the QRP’s governing documents to properly advise the surviving spouse on his or her options.

  1. What are a surviving spouse’s options, and the associated implications, if the deceased spouse died on or after his or her RBD?

A.  Option 1: Spousal Rollover. The surviving spouse may rollover the deceased spouse’s IRA assets to the surviving spouse’s own IRA. If the decedent’s IRA has multiple beneficiaries, the surviving spouse may rollover his or her respective portion of the decedent’s IRA. The surviving spouse may then defer MRDs, and the associated income tax liability, until the date of the surviving spouse’s own RBD.

B. Option 2: Inherited IRA. If the surviving spouse elects to treat the deceased spouse’s IRA as an inherited IRA, then no later than December 31 of the year after the deceased spouse’s year of death the surviving spouse must begin to take MRDs based upon the longer of (i) the Decedent’s remaining life expectancy, or (ii) the surviving spouse’s life expectancy.

C.  Note regarding QRP Assets. While many QRPs include a Rollover IRA option and an Inherited IRA option, the QRP’s governance documents will set forth the surviving spouse’s options with respect to the deceased spouse’s retirement assets. Thus, one should closely review the QRP’s governing documents to properly advise the surviving spouse on his or her options.

D.  Disclaimer regarding Year of Death MRD. If the deceased spouse dies on or after his or her RBD then, regardless of the surviving spouse’s election, the surviving spouse must take the deceased spouse’s year of death MRD, if it is not already taken, using the deceased spouse’s life expectancy.

Beneficiaries of retirement plan assets should consult with qualified legal, financial and tax counsel to analyze and consider his or her options. I am hopeful that this brief article provides some insight into the decision-making process and the Internal Revenue Code’s treatment of retirement plan assets.

Finally, I note that all of the options set forth above do not address retirement assets left in a see-through trust, conduit trust or accumulation trust for the benefit of a surviving spouse or other beneficiaries. If properly structured, these trusts may mitigate the income taxation of the retirement assets by qualifying designated beneficiaries and avoiding the application of the five-year rule. I intend to address the planning opportunities associated with leaving retirement plan assets in trust in a separate, subsequent article.

Christian Perrin has substantial experience advising individuals and institutions on estate planning, estate administration and probate law issues, including issues with retirement benefits. He also represents beneficiaries and fiduciaries in trust and estate related disputes. He is licensed to practice law in North Carolina, South Carolina and Georgia.

The content on this article is offered only as a public service to the web community and does not constitute legal advice or create an attorney-client relationship.  This information should not be used as a substitute for obtaining legal advice from an attorney authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter.

April 19th, 2016|