By Andy Ives, CFP®, AIF®
Good Afternoon Ed Slott and Company, LLC,
I was inquiring about a recent situation with a client that came up and if you could be of any assistance. We recently had a client pass away who was the account holder of an inherited IRA from his mother. This client died in July 2020. The deceased listed his wife as 100% primary beneficiary of his inherited IRA and she will inherit this second-generation IRA once the new account is opened.
In what ways (if any) would the SECURE Act play a role here in the new second-generation inherited IRA account for the recent widow? Since she is a non-spouse of the original account holder (deceased husband’s mom), would the account need to be emptied in 10 years (starting in 2021)? Or would she assume her husband RMD withdrawal provisions and stretch the payments over her lifetime? Or would another rule take precedent?
This is the first case we have seen, so any help or knowledge would be greatly appreciated.
The answer here is cut and dried. Under the SECURE Act, any successor beneficiary (beneficiary of a beneficiary) who inherits in 2020 or later follows the 10-year payout rule. It does not matter if the successor beneficiary is a spouse of the beneficiary or disabled or any of the other groups of people who can still stretch payments. It also does not matter if the original beneficiary inherited the account before the SECURE Act became effective in 2020. Successor beneficiaries in 2020 or later must empty the account by the end of the 10th year after the year of death. Note that if the successor beneficiary dies during the 10-year window, the next beneficiary in line does not receive a new 10-year payout. They can only continue the existing 10-year term.
Had a unique situation arise and haven’t been able to find a clear answer. Client made a 2020 non-deductible $6,000 IRA contribution and immediately converted to Roth in 3/2020. Roth was invested in travel sector and plummeted from $6,000 to $2,300. Client panicked, sold the stock and took a premature withdrawal, thinking he could just redeposit the $2,300 along with $3,700 more into a Traditional IRA for 2020, and redo the entire transaction as if the first one never happened.
Since that is not an option, he is now beyond the 60-day redeposit window. Does the CARES Act apply to Roth IRAs, thereby allowing him to at least redeposit the $2,300 back into the Roth?
Since the $2,300 “panicked distribution” was taken more than 60 days ago, it cannot be rolled back into the Roth IRA. The CARES Act extended the rollover deadline to August 31 for unwanted 2020 RMDs, but that will not help here. Also, the client cannot “start over,” because he already made his maximum IRA contribution for 2020 when he contributed the $6,000 to the Traditional IRA. Anything else would be an excess contribution. The good news is that there is no penalty on the $2,300 distribution, even if the client is under 59 ½, because the Roth conversion was done with non-deductible dollars. Also, there is no tax due because there are no earnings. Unfortunately, the client will be saddled with all the applicable 2020 tax forms for a non-deductible IRA contribution (Form 8606), for a Roth conversion (Forms 1099-R and 5498), and sadly will have $3,700 less than when he started.
Question: Good Afternoon Ed Slott and Company, LLC, I was inquiring about a recent situation with a client that came up and if you could be of any assistance. We recently had a client pass away who was the account holder of an inherited IRA from his mother.