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This week’s Slott Report Mailbag looks into inherited IRAs, RMDs, and NUAs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

Question:

I have a question about a spouse inheriting from her husband’s “Qualified Annuity” upon his death. He was an NYPD police officer. She was the sole beneficiary at his death on 03/22/2016. He made no contributions to it during his lifetime as his employer made all contributions.

The annuity was held by Wells Fargo, and she then converted it to a Traditional IRA in her name. Afterwards she moved it [custodian to custodian] to Vanguard.

The sole beneficiary spouse turns 70 1/2 years old on 04/02/2018. Her deceased husband would have turned 70 1/2 years old on 12/04/2017.

I read IRS Pub. 590B and need clarification to when the RMD must begin. Since she is now the owner, does she begin taking RMD in tax year 2018 or is it based on when her husband would have turned 70.5 years old in tax year 2017?

Thank you very much. John

Answer: 

You included some information in your question that is confusing, so I want to be really clear in the answer. There is a huge difference between being the owner of the account and having an inherited account.

If she is the owner of the account, then the account is titled in her name only. The account is treated as though it had always been hers. RMDs will begin in the year she turns 70 ½. His age will no longer have anything to do with RMDs. She will use the Uniform Lifetime Table to determine the factor to use for her RMDs each year.

If the account is set up as an inherited account, there will be some indication in the title of the account that it is an inherited account. Then RMDs will begin in the year he would have been 70 ½. She will use the Single Life Expectancy Table to determine the factor to use for her RMDs each year. Since she is a spouse beneficiary, she can still move the funds to an IRA in her own name and treat the account as her own.

Question:

Hello,

I retired from my company in 2008 at age 55. Between 2009-2011, I elected to receive dividend in cash from the company stocks residing in my 401K plan. I received a 1099-R at the year-end for the three consecutive years. The Box 7 of the 1099 has a code “U-Dividend distribution from ESOP under section 404k.” Except for the dividend, I have not taken any other distributions from my 401k. I would like to take advantage of the NUA for my company’s stock this year. However, I’m concerned that the dividend distribution in the past may negate my ability to utilize the NUA.

I could not find any rules one way or another in the code regarding this subject. I think the fundamental question is whether the dividend distribution is considered a “partial distribution” from the plan. I’m thinking this distribution is not a “withdrawal” nor a “partial distribution” as it has a set of different rules, i.e. not subject to 20% withholding tax, no 10% penalty, and cannot be rolled over etc., unlike the normal distribution.

I hope you have an answer for me.  Your help will be greatly appreciated.

Janie

Answer:

Long question, short answer. You are correct that the dividend distributions are not a withdrawal nor a partial distribution from the plan because they are ineligible for rollover treatment. That is why they are directly distributed to you. You are still fully eligible to do an NUA transaction with the employer stock held in your account as long as you meet all the other NUA requirements.

This week’s Slott Report Mailbag looks into inherited IRAs, RMDs, and NUAs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here. Question: I have a question about a spouse inheriting from her husband’s “Qualified Annuity” upon his death. He was an NYPD police officer. She was the sole beneficiary at his death on 03/22/2016. He made no contributions to it during his lifetime as his employer made all contributions. The annuity was held by Wells Fargo, and she then converted it to a Traditional IRA in her name. Afterwards she moved it [custodian to custodian] to Vanguard. The sole beneficiary spouse turns 70 1/2 years old on 04/02/2018. Her deceased husband would have turned 70 1/2 years old on 12/04/2017. I read IRS Pub. 590B and need clarification to when the RMD must begin. Since she is now the owner, does she begin taking RMD in tax year 2018 or is it based on when her husband would have turned 70.5 years old in tax year 2017? Thank you very much. John Answer:  You included some information in your question that is confusing, so I want to be really clear in the answer. There is a huge difference between being the owner of the account and having an inherited account. If she is the owner of the account, then the account is titled in her name only. The account is treated as though it had always been hers. RMDs will begin in the year she turns 70 ½. His age will no longer have anything to do with RMDs. She will use the Uniform Lifetime Table to determine the factor to use for her RMDs each year. If the account is set up as an inherited account, there will be some indication in the title of the account that it is an inherited account. Then RMDs will begin in the year he would have been 70 ½. She will use the Single Life Expectancy Table to determine the factor to use for her RMDs each year. Since she is a spouse beneficiary, she can still move the funds to an IRA in her own name and treat the account as her own. Question: Hello, I retired from my company in 2008 at age 55. Between 2009-2011, I elected to receive dividend in cash from the company stocks residing in my 401K plan. I received a 1099-R at the year-end for the three consecutive years. The Box 7 of the 1099 has a code “U-Dividend distribution from ESOP under section 404k.” Except for the dividend, I have not taken any other distributions from my 401k. I would like to take advantage of the NUA for my company’s stock this year. However, I’m concerned that the dividend distribution in the past may negate my ability to utilize the NUA.  I could not find any rules one way or another in the code regarding this subject. I think the fundamental question is whether the dividend distribution is considered a “partial distribution” from the plan. I’m thinking this distribution is not a “withdrawal” nor a “partial distribution” as it has a set of different rules, i.e. not subject to 20% withholding tax, no 10% penalty, and cannot be rolled over etc., unlike the normal distribution. I hope you have an answer for me.  Your help will be greatly appreciated.  Janie Answer: Long question, short answer. You are correct that the dividend distributions are not a withdrawal nor a partial distribution from the plan because they are ineligible for rollover treatment. That is why they are directly distributed to you. You are still fully eligible to do an NUA transaction with the employer stock held in your account as long as you meet all the other NUA requirements.