Potential Income and Estate Tax Savings
The death of a husband or wife can be an overwhelming time for the surviving spouse, especially when it comes to financial decisions.
When a spouse dies, many surviving spouses elect to transfer retirement assets to their own accounts, thereby treating the assets as their own. This is often referred to as a spousal rollover.
In some cases, however, it may make sense for the surviving spouse to keep them separate. By treating themselves as the retirement account beneficiary, rather than the owner, they could gain additional financial advantages.
Beginning in 2024, a surviving spouse who is designated as the sole beneficiary of an employee covered by a qualified retirement plan or other plan to which Required Minimum Distribution (RMD) rules apply, or who is the designated beneficiary of an IRA owner, may elect to be treated as the employee for purposes of the RMD rules.
According to the IRS, RMDs are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 73. Retirement plan account owners can delay taking their RMDs until the year in which they retire, unless they are a 5 percent owner of the business sponsoring the plan.
In order to take advantage of this provision and elect to be treated as the employee, the surviving spouse must make timely notice to the plan administrator regarding this decision. It is also important to note that once this election is made, it cannot be revoked.
Advantages of Being Treated as the Employee
Why would a surviving spouse want to make this election? For both income and estate tax purposes, it allows the tax-deferred funds to remain tax-deferred for a longer period of time.
The following are two examples of cases in which this benefit would apply:
- If the original account owner dies before they reach the age that they must start taking their RMD, and the surviving spouse is younger and does not need to take distributions for their own support, the election allows them to defer taking distributions until the date the original account owner would have reached the age that RMD would be required.
- If the original account owner dies after they have already begun taking RMD, the RMD for the surviving spouse would be recalculated using the greater of:
- The surviving spouse’s life expectancy using the Single Uniform Lifetime Table, or
- The descendant’s life expectancy using the same table.
In general, if the surviving spouse is more than 10 – 12 years older than the descendant, the descendant’s life expectancy will usually be used to calculate the surviving spouse’s RMD, thereby minimizing the amount of the RMD for the spouse’s remaining lifetime.
An additional concern related to this election is what happens if, under the circumstances outlined in the first example above, the surviving spouse also dies before reaching the age when RMD is required. In this case, the surviving spouse’s beneficiaries will be treated as the employee, thereby continuing the deferral of the RMD requirement.
Plan Ahead
The death of a spouse is a difficult time for many, but it is important to understand that decisions made regarding inherited retirement accounts have a long-term impact on the financial and tax concerns of the surviving spouse.
One way to avoid making this difficult decision is to plan ahead. Zinner & Co. offers an array of Individual and Family Advisory Services, including, but not limited to, Estate Planning and Post Mortem Planning. By planning ahead, you and your spouse can make the best decisions for your future together.
Please reach out to one of your Zinner Service Team members for support in making these decisions.
