The Code provides special minimum distribution rules that apply when the beneficiary is the participant’s spouse. These rules are intended to provide more favorable treatment when the spouse is the beneficiary, though the effect is not always favorable (see ¶ 1.6.05). For most of the “special deals” the spouse must be the sole beneficiary. In some cases, a trust for the spouse’s benefit can qualify for the same treatment available to the spouse individually; see ¶ 1.6.06.
“Spouse” vs. “Surviving Spouse”
The minimum distribution regulations often refer to the spouse as the participant’s “surviving spouse” even while they are both alive. Of course, while the participant is alive his spouse is not yet (and may never become) the “surviving” spouse. In this Seminar Outline, as in the regulations, “spouse” and “surviving spouse” are used interchangeably.
1.6.01 Overview of the special spousal rules
There are four special provisions that may apply when the participant’s spouse is named as beneficiary:
A. Lifetime distributions: Much-younger-spouse method. If the participant’s sole beneficiary is his more-than-10-years-younger spouse, the participant’s lifetime MRDs are computed using the Joint and Last Survivor Table rather than the Uniform Lifetime Table. See ¶ 1.3.03.
B. Postponed Required Commencement Date. If the participant dies before his Required Beginning Date (RBD; ¶ 1.4) leaving benefits to his surviving spouse as sole beneficiary, see ¶ 1.6.04 regarding a possible later Required Commencement Date for MRDs to the spouse, and ¶ 1.6.05 for related rules if the spouse dies after the participant but prior to her Required Commencement Date.
C. Spouse’s life expectancy recalculated. When the surviving spouse is the sole beneficiary, and withdraws benefits using her life expectancy as the ADP, her life expectancy is recalculated annually; see ¶ 1.6.03(D). Other beneficiaries must use the fixed-term method (¶ 1.5.05).
D. Spouse can roll over inherited benefits. The participant’s surviving spouse can roll over to another retirement plan, tax-free, benefits she inherits from the participant. The spouse does NOT have to be the sole beneficiary to have this right (which, unlike A–C, is not a “minimum distribution rule”). A spouse who is the participant’s sole beneficiary also has the right to treat an IRA inherited from the deceased spouse as her own IRA. See ¶ 3.2 of Life
and Death Planning for Retirement Benefits for more on that subject. 1.6.02 Definition of “sole beneficiary”
For purposes of the special minimum distribution rules applicable to a spouse-beneficiary (though not for purposes of the spousal rollover), the participant’s surviving spouse must be the “sole” beneficiary. The spouse is the sole beneficiary if she, alone, will inherit all of the benefits if she survives the participant; in other words if she is the sole primary beneficiary. The fact that other beneficiaries are named as contingent beneficiaries (who will inherit if the spouse does not survive the participant, or does not survive him for some specified period of time) does not impair her status as “sole” beneficiary.
Bud Example: The beneficiary designation form for Bud’s IRA provides: “I name my spouse, Louise, as my sole primary beneficiary, to receive 100 percent of all benefits payable under this Plan on account of my death if she survives me. If she does not survive me, the benefits shall instead be paid to my sister Gladys.” The spouse, Louise, is Bud’s sole beneficiary so long as both spouses are alive. She is Bud’s sole beneficiary at his death if she survives him and does not disclaim the benefits. The fact that Gladys is named as a contingent beneficiary does not impair Louise’s status as sole beneficiary.
Reminder: If the “separate accounts” rule applies for ADP purposes, the test of whether the spouse is the “sole beneficiary” is applied only to the separate account of which the spouse is the/a beneficiary. Reg. § 1.401(a)(9)-8, A-2. See PLR 2001-21073 and ¶ 1.8.01(A).
The applicable time for determining whether the participant’s spouse is the sole beneficiary differs depending on which tax provision is being considered:
T For purposes of computing MRDs during the participant’s life, see ¶ 1.3.03.
T For purposes of the post-death minimum distribution rules (¶ 1.6.03–1.6.05), the spouse must be sole beneficiary as of September 30 of the year after the year of the participant’s death (the Beneficiary Finalization Date; ¶ 1.8.03), and “a” beneficiary on the date of death (¶ 1.7.02). Reg. § 1.401(a)(9)-8, A-2(a)(2). In some cases, if the surviving spouse is just one of several beneficiaries on the date of death, it will be possible to “remove” the other beneficiaries (by
means of disclaimer, distribution, or by establishing separate accounts by 12/31 of the year after the year of the participant’s death; ¶ 1.8.01(B)) so that the spouse can become the sole beneficiary by the Beneficiary Finalization Date. The suspension of the minimum distribution rules for the year 2009 (¶ 1.1.04) did NOT extend either of these deadlines, even if the year of death was 2008 or 2009. IRS Notice 2009-82, 2009-41 IRB 491, Part V, A-4.
T In the case of the spouse’s right to elect to treat the deceased spouse’s IRA as the spouse’s own IRA (¶ 3.2.03), she can make this election at any time after the participant’s death provided that she is the sole beneficiary as of the Beneficiary Finalization Date (¶ 1.8.03). See Reg. § 1.408-8, A-5(a).
1.6.03 How to determine the spouse’s life expectancy
This is one of the more confusing aspects of the minimum distribution rules. There are several different ways to compute MRDs for benefits left to (or in trust for) a surviving spouse, though there is only one correct method for each particular situation.
Usually, the spousal rollover (see “A”) or election (“B”) provides better results (more deferral opportunities) for the surviving spouse and her beneficiaries than does holding the account as beneficiary (C–E). See ¶ 3.2.01(A)–(C) of Life and Death Planning for Retirement Benefits for why that is so; ¶ 3.2.01(D) for when the spousal rollover or election should NOT be used; and ¶ 3.2.01(E) for whether to use rollover or election.
A. If the spouse rolls over the benefits to her own plan. Unlike other beneficiaries, the surviving spouse has the ability to roll over, tax-free, to her own IRA or to her own account in any other eligible retirement plan, any QRP, IRA, or 403(b) benefits left to her by her deceased spouse. See ¶ 3.2.02–¶ 3.2.04 of Life and Death Planning for Retirement Benefits. Following such a rollover, the benefits are now in the spouse’s own retirement plan, and are no longer in an “inherited plan.” Accordingly, she takes MRDs as “participant” (¶ 1.3) rather than as “beneficiary” (¶ 1.5) beginning the year after the rollover (Reg. § 1.408-8, A-7); for requirements applicable to the distributing plan in the year in which the rollover occurs, see ¶ 2.6.03, Appendix B.
For the year following the rollover and later years, the spouse’s RBD and MRDs will be determined in exactly the same manner as would be true for any other participant in that particular type of plan or IRA. For Roth IRAs, see ¶ 3.2.03(B) of Life and Death Planning for Retirement
Benefits. For traditional plans and IRAs, see ¶ 1.4 for the RBD and ¶ 1.3 to determine the MRDs.
The surviving spouse also has the right to “roll over” inherited benefits to an IRA in the name of the deceased spouse; see ¶ 3.2.07 of Life and Death Planning for Retirement Benefits. If benefits are held in or rolled over to an “inherited” plan or IRA, see “D” for how to compute the MRDs.
B. If the spouse elects to treat an inherited IRA or Roth IRA as the spouse’s own. Unlike other IRA beneficiaries, the surviving spouse has the ability to elect to treat a traditional or Roth IRA that she (as sole beneficiary) inherits from the deceased spouse as her own
traditional or Roth IRA. See ¶ 3.2.03 of Life and Death Planning for Retirement Benefits. Once she has made this election, the IRA is treated as the spouse’s own IRA. If the account is a Roth IRA, see ¶ 3.2.03(B). If it is a traditional IRA, see ¶ 1.4 for the RBD and ¶ 1.3 for how to determine the MRDs.
The exception to this rule is that the MRD for the year of the participant’s death is still based on the distribution rules applicable to the decedent. Reg. § 1.408-8, A-5(a); ¶ 1.5.03(A); ¶ 1.5.04(A). If the surviving spouse makes the election in the same year the participant died, MRDs will be calculated based on her being the participant beginning the following year. If she makes the election in any year after the year of the participant’s death, her election is retroactive to the beginning of the year the election occurs, so MRDs will be calculated based on her being the participant beginning with the year of the election. Reg. § 1.408-8, A-5(a), fifth and sixth sentences. The “account balance” (¶ 1.2.05) used to compute the MRD for the year of the election is (presumably; there is no specific IRS pronouncement on this point) the prior year-end account balance of the elected account, even though the account was not “hers” in such prior year.
C. If the spouse is the oldest of multiple Designated Beneficiaries. If benefits are left to a see-through trust (¶ 6.2.03, Appendix B) of which the surviving spouse is the oldest beneficiary, but of which the spouse is not the sole beneficiary, then the trust’s ADP is the life expectancy of the surviving spouse, determined as of her birthday in the year after the year of the participant’s death. MRDs to the trust are calculated using the Single Life Table (¶ 1.2.03) and the fixed-term method (¶ 1.2.04(A)), just as would be true if the oldest Designated Beneficiary were someone other than the spouse. Reg. § 1.401(a)(9)-5, A-5(c)(1); see ¶ 1.5.03(D), ¶ 1.5.04(D), ¶ 1.5.05. The same is true whenever there are multiple Designated Beneficiaries of whom the surviving spouse is the oldest; however, this rule is most likely to apply when a trust is named as beneficiary, because normally, if multiple beneficiaries are named as beneficiaries not through a trust, they will arrange to have their respective interests treated as separate accounts (¶ 1.8.01(B)). When this rule applies, the spouse’s later death will have no impact on the ADP for the benefits; see “E” below.
D. During spouse’s life, if the spouse is the sole Designated Beneficiary. If the spouse is the sole beneficiary of the deceased participant; or if a trust is named as sole beneficiary and the spouse is deemed to be the sole beneficiary of the trust (see ¶ 1.6.06(A), (B)); then the ADP for distributions to the spouse (or such trust) will generally be the surviving spouse’s life expectancy. (The exceptions would be, if the participant died before his RBD and the spouse or trust elected or was defaulted into the 5-year rule, ¶ 1.5.07; or if the participant died after his RBD and the ADP is what would have been the participant’s life expectancy because the participant was younger than the surviving spouse, ¶ 1.5.04(B).) The spouse’s life expectancy will be determined using the Single Life Table (¶ 1.2.03) and the spouse’s age on her birthday in each year for which a distribution is required (recalculation method; ¶ 1.2.04(A)). Reg. § 1.401(a)(9)-5, A-5(c)(2) (first sentence), A-6. See ¶ 1.6.02 for how to determine whether the spouse is the “sole beneficiary.”
Josephine Example: Napoleon died, after his RBD, leaving his 401(k) plan to his surviving spouse, Josephine, as sole beneficiary. She is taking annual MRDs as Napoleon’s beneficiary; she did not roll over the benefits to her own retirement plan. Each year, the plan sends an MRD to Josephine based on her life expectancy (from the Single Life Table) for her attained age on her birthday in the year of the distribution (i.e., her age as of the end of each Distribution Year). Josephine turned 46 in the year after Napoleon’s death, so her “divisor” (ADP) for that year (her first Distribution Year) was 37.9. For the second Distribution Year, Josephine’s divisor is not 36.9 (37.9 minus one—as it would be under the fixed-term method; see Diane Example, ¶ 1.5.05(A)); instead Josephine’s second year divisor is 37.0 (the life expectancy of a person age 47). Josephine, as a surviving spouse-sole beneficiary, determines her divisor each year by going back to the Single Life Table and determining her new life expectancy based on her new age (recalculation method).
Note that the spouse does not have to “elect” to use the recalculation method; that’s just how her MRDs are determined. If a surviving spouse made a mistake, for example, and computed her MRDs using the fixed-term method, that would not change the amount of her actual MRD; it would just mean that she was taking larger distributions than she was required to take. If she caught her error quickly enough, she could roll the excess back into a tax-deferred account to avoid paying tax on it.
E. MRDs to spouse’s successor beneficiaries. If “D” above applied during the spouse’s life, and the spouse later dies on or after her Required Commencement Date, the MRD for the year of her death must be paid out to the successor beneficiary to the extent the spouse had not already taken it by the time of her death. Any remaining benefits must be paid out (beginning the year after the year of the spouse’s death) over the spouse’s remaining life expectancy, using the fixed-term method (¶ 1.2.04(B)). This is computed based on the age she attained (or would have attained if she lived long enough) on her birthday in the year of her death and reduced by one year for each year thereafter. Reg. § 1.401(a)(9)-5, A-5(c)(2). It is not clear whether this rule (successor beneficiaries take over what’s left of the surviving spouse’s life expectancy) applies even if the ADP that applied to the spouse herself was the participant’s remaining life expectancy rather than her own (see ¶ 1.5.04(B)).
1.6.04 Required Commencement Date: Distributions to spouse
If the participant dies on or after his RBD (¶ 1.5.04), the Required Commencement Date for MRDs to the surviving spouse-beneficiary (¶ 1.6.03(C)–(E)) is the same as the Required Commencement Date for distributions to any other beneficiary: December 31 of the year after the year of the participant’s death (or, if the participant died in 2008, December 31, 2010; ¶ 1.1.04). Reg. § 1.401(a)(9)-2, A-5. As is true for other beneficiaries, the spouse as beneficiary must also withdraw, by the end of the year of the participant’s death, any part of the year-of-death MRD not distributed during the participant’s life. ¶ 1.5.04(A).
If the participant dies prior to his RBD, and the spouse is the sole Designated Beneficiary (¶ 1.6.03(D)), annual distributions to the spouse over her life expectancy do not have to begin until the later of the following years, “X” or “Y”:
X: The year following the year in which the participant died (unless the decedent died in 2008, in which case the “X” year is 2010); or
Y: The year in which the participant would have reached age 70½ (unless the decedent would have reached age 70½ in 2009, in which case the “Y” year is 2010).
§ 401(a)(9)(B)(iv)(I); Reg. § 1.401(a)(9)-3, A-3(b); IRS Notice 2009-82, Part V, A-2. Thus, the surviving spouse’s “Required Commencement Date” is December 31 of whichever of the above two years (X or Y) is applicable. However, the spouse may have to make an irrevocable election earlier
than that deadline to preserve her rights; see ¶ 1.5.07(C). 1.6.05 Special “(B)(iv)(II) rule” if both spouses die young
If the participant died before his RBD, and his spouse survives him, and the surviving spouse is the sole Designated Beneficiary (¶ 1.6.02), the spouse does not have to commence taking MRDs until the end of the year in which the participant would have reach age 70½, as explained at ¶ 1.6.04. § 401(a)(9)(B)(iv)(II) then provides a special rule that applies upon the surviving spouse’s later death if she dies before this “Required Commencement Date.”
Under the special (B)(iv)(II) rule, MRDs for years after the year of the spouse’s death will
not be based on the spouse’s remaining life expectancy, as would normally be true for MRDs
payable to successor beneficiaries (see ¶ 1.5.13). Rather, a new distribution period starts: The post- death rules of § 401(a)(9)(B)(ii) and (iii) will be applied “as if the surviving spouse were the employee” for purposes of determining MRDs to the successor beneficiary(ies) after her death…meaning that the benefits will have to be distributed over the life expectancy of the surviving
spouse’s Designated Beneficiary or under the 5-year rule (see ¶ 1.5.07).
The (B)(iv)(II) rule is quite confusing, so must be explained in detail:
A. Rule applies only if participant died before his RBD. Under the structure of § 401(a)(9), the (B)(iv)(II) rule can apply only if the participant dies before his RBD. See Reg. § 1.401(a)(9)-3, A-1, confirming that § 401(a)(9)(B)(ii), (iii), and (iv) apply only if the employee (participant) “dies before the employee’s required beginning date (and, thus, before distributions are treated as having begun in accordance with section 401(a)(9)(A)(ii)).” Reg. § 1.401(a)(9)-5, A-5(b), reiterates that the special rules of “(B)(iv)” apply only if the employee dies before his RBD, as does IRS Publication 575 (2012), pp. 36–37. (For the record, in PLR 2009-45011, the IRS erroneously applied the (B)(iv)(II) rule in a case where the participant died after his RBD.)
B. …And spouse dies before her Required Commencement Date. The second condition that must exist for the (B)(iv)(II) rule to apply is that the surviving spouse-sole beneficiary of the account “dies before the distributions to such spouse begin.” § 401(a)(9)(B)(iv)(II). Under the regulations, the date distributions “begin” means the date distributions are required to
31 of the year in which the decedent would have reached age 70½ (or of the year after the year of the participant’s death, if later). Reg. § 1.401(a)(9)-3, A-3(b), A-5, A-6.
Michelle Example: Michelle died in Year 1 at age 68, leaving her IRA to her husband Bill as sole beneficiary. Had she lived, Michelle would have reached age 70 in Year 3, and would have reached age 70½ in Year 4, so her RBD would have been April 1, Year 5 (¶ 1.4.02). She died before her RBD, with her spouse as sole beneficiary, so Bill’s Required Commencement Date is December 31 of Year 4 (the year Michelle would have reached age 70½). To comply with the minimum distribution rules, Bill takes what would be the Year 4 MRD (computed based on his life expectancy as beneficiary; see ¶ 1.6.03(D)) on November 1 of Year 4. He never elects to treat the IRA as his own (see ¶ 3.2.03 of Life and Death Planning for Retirement Benefits). He dies on December 1, Year 4. Because he died before his Required Commencement Date, the (B)(iv)(II) rule applies; see “C” for how to determine MRDs after Bill’s death. This is true even though he had actually started taking distributions, because he died before the date he was required to take distributions.
Grenville Example: Grenville dies in Year 1 at age 68, leaving his IRA to his wife Rowena as sole beneficiary. Had he lived, Grenville would have reached age 70½ in Year 3, so his RBD would have been April 1, Year 4 (¶ 1.4.02). He died before his RBD, with his spouse as sole beneficiary, so Rowena’s Required Commencement Date is December 31 of Year 3 (the year Grenville would have reached age 70½; ¶ 1.6.04). In order to comply with the minimum distribution rules, Rowena takes what would be the Year 3 MRD (computed based on her life expectancy as beneficiary; ¶ 1.6.03(D)) on November 1 of Year 3. She never elects to treat the IRA as her own (see ¶ 3.2.03 of Life and
Death Planning for Retirement Benefits). Rowena dies on January 1, Year 4. Because she died after