IRA Alert

A younger spouse can lower required minimum distributions

If the IRA owner's spouse is more than 10 years their junior, the holder can use a different IRS table to calculate RMDs

Dec 10, 2018 @ 11:00 am

By Ed Slott

Here's one I haven't heard before.

I received a question from a financial adviser wondering if he could help his client reduce his required minimum distribution burden and the resulting tax on his $2 million individual retirement account by using the Joint Life and Last Survivor Expectancy Table (IRS Publication 590-B, Table II).

The client was age 72 and his wife was 48. That table would produce a joint life factor of 36.6 years, resulting in a $54,645 RMD. If he had to use the regular Uniform Lifetime Table (Table III), that factor would be 25.6 years, producing an RMD of $78,125: $23,480 higher, or a whopping 43% increase in taxable income!

However, there was a problem. The client didn't want his wife to actually be the named beneficiary, but he did want to use the joint table and save on the taxes. So his plan was to name his wife as the beneficiary on Dec. 27 and then remove her as the beneficiary on Jan. 3 next year. He thought that if she was the named beneficiary on the last day of the year, he would qualify to use the joint table and significantly lower his RMD tax bill.

That won't work, not to mention what would happen if he died during those few days over New Year's when his wife was the named beneficiary. Then she would inherit his IRA, which he did not want.

(More: Lawmakers want to reform rules around RMDs)

To qualify to use the joint table, the spouse must not only be more than 10 years younger than the IRA owner but be the sole beneficiary for the entire year.

After I told him that, he had a follow-up idea. What if he named a qualified terminable interest property trust as the beneficiary, where his wife would be the income beneficiary but after her death the IRA funds would go to his other beneficiaries?

That won't work either because in that case the spouse is not considered the sole beneficiary, even though she is the beneficiary of the trust. A discretionary trust also would not qualify since the spouse may not be the sole beneficiary.

One strategy that would work is if the IRA beneficiary were a conduit-type trust in which the spouse would receive the RMDs each year and be considered the sole beneficiary, assuming the trust also met the requirements of a so-called "see-through" trust. But again, she might be entitled to all of the IRA funds, which he did not want.

(More: Are Roth conversions after 70½ advisable? 5 factors to consider)

The majority of IRA owners will use the Uniform Lifetime Table to calculate their annual required minimum distributions. Regardless of who the beneficiary is (even if the estate is the beneficiary), that table assumes that the beneficiary is 10 years younger than the IRA owner and those two ages are built into the table.

Only when the spouse is more than 10 years younger than the IRA owner and the spouse is the sole beneficiary of the IRA for the entire year will the age of the spouse also be used to determine the life expectancy factor for the year. In this case, the IRA owner can use the Joint Life Expectancy Table instead of the Uniform Lifetime Table and take advantage of the lower RMDs and the reduced tax bill.

If the spouse dies during the year, the IRA owner can still use the Joint Life Expectancy Table for that year only. In subsequent years, the Uniform Lifetime Table must be used. If the IRA owner divorces the spouse during the year and names a different beneficiary for the IRA account that year, then the IRA owner must use the Uniform Lifetime Table for calculating their RMD for that year and all subsequent years.

A marriage to a new spouse who is more than 10 years younger and is a sole beneficiary would allow the IRA owner to go back to using the Joint Life Expectancy Table.

Ed Slott, a certified public accountant, created Ed Slott's 2-Day IRA Workshop and Ed Slott's Elite IRA Advisor Group. For more information, visit www.IRAhelp.com.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Apr 17

Conference

Innovation Summit 2019

InvestmentNews will gather the biggest names and the brightest minds in the financial services industry in one room, for one day. This new event will include the icons and innovators alumni, along with those recognized on this year’s list to... Learn more

Featured video

INTV

How advisers can engage clients to see if they value ESG

A focus on environmental, social and governance can keep clients more connected to their advisers, according to impact investing expert Colleen Denzler.

Latest news & opinion

Morgan Stanley rides wealth management train to solid first quarter

Chairman and CEO James Gorman expresses excitement about expanding into workplace plans with purchase of Solium.

Fate of New Jersey fiduciary standard could come down to politics, court

With strong support from N.J. Gov. Phil Murphy, the proposal has momentum out of the gate.

Growing wealth fuels demand for family offices

The market for serving wealthy families may be bigger than some data suggest.

FPA backs away from controversial plan to merge chapters

The group is no longer seeking to dissolve local chapters as separate legal entities.

RIA succession plan takes the long view

The transfer of ownership over 22 years leverages company shares as an employee reward-and-retention tool.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print