By Andy Ives, CFP®, AIF®
Gold members of a national hotel chain, big airline or just the local club expect lofty benefits for their dedicated patronage. Bronze members have access to A, B and C. Silver members have access to A, B, C, plus D, E and F. At the highest level, gold members earned not only A through F, but also whatever additional allowances their premium membership affords. Are gold members cut off from any exclusive discounts that a bronze or silver member receives? Not typically. Do bronze and silver-level members earn first-class seating or premium hotel rooms that honored gold members are barred from? Of course not. As the saying goes, “membership has its privileges,” and gold members at the top of the pyramid have it all.
Under the SECURE Act, the gold standard for IRA beneficiaries are Eligible Designated Beneficiaries (EDBs). This elite group of individuals are still allowed to stretch inherited IRA required minimum distributions (RMDs) over their own life expectancy. EDBs include spouses, minor children of the account owner, disabled individuals, chronically ill individuals, and beneficiaries not more than ten years younger than the deceased IRA owner.
Within this EDB group, it can be argued that spouses are the pinnacle. Spouses are the only EDB who can do a spousal rollover of an IRA into their own. Spouses are the only EDB who can choose an inherited IRA for a certain period (e.g., while they are under 59 ½), and then do a spousal rollover at any time in the future. Spouses also have the advantage of being able to recalculate their life expectancy when subject to RMDs on an inherited account, thereby lowering RMDs vs. non-spouse EDBs.
The surviving spouse: gold standard of the Eligible Designated Beneficiaries, top member of the EDB club. No other bronze or silver beneficiary – not another EDB, and certainly not a Non-Eligible Designated Beneficiary (NEDB) – should be able to do anything more flexible or tax efficient than the alpha EDB surviving spouse…or can they?
The SECURE Act created a 10-year payout rule for NEDBs. Not only is this class of beneficiary forbidden from stretching inherited IRA RMDs over their life expectancy, but they are forced to completely empty the inherited IRA by the end of the 10th year after the year of death of the original IRA owner. If an NEDB dies during this 10-year window, their successor beneficiary can only extend payments for the duration of that original 10-year timeframe.
Can a surviving spouse elect the 10-year payout? The SECURE Act is unclear, and the experts disagree. If a 75-year-old dies and leaves his IRA to his adult NEDB son, the son may use the flexible 10-year payout. If that same 75-year-old were to leave the IRA to his surviving spouse – a gold member of the EDB class – can she choose the 10-year payout?
The 10-year payout would allow her to avoid RMDs on the inherited IRA for a decade. It would also allow her to delay a spousal rollover, thereby preventing a combined RMD the following year. As a gold-member EDB, can she choose the 10-year option and do a spousal rollover right before the 10 years expire, thus avoiding the full 10-year payout requirement altogether?
Does membership have its privileges?