My wife of 65 years passed away and my RMDs were doubled due to an IRA mistake.

My wife’s 2022 required minimum distributions were paid into my checking account at the same bank. The balance was then entered into a new account with an ownership description marked Inherited IRA. Over time, I took RMDs for her account and my IRA. Surprisingly, the RMD on the inherited IRA was roughly double the amount I received from the IRA. The amounts in both accounts were almost the same.

Through my research, I discovered that as my wife’s sole beneficiary and surviving spouse, I should have not completed the inherited IRA form and instead converted to my own IRA. I requested that the RMD be canceled and reissued at a lower amount.

But my bank said I couldn’t change my IRA ownership description now and that I would have to take more money.

I feel like a victim here. I followed their instructions and it was wrong. Now I will have to pay higher taxes sooner, seeing my affected IRAs rapidly depleted. Is there anything I can do?

thank you,

ed

Dear ED,

You and your wife have been together for a long time and this must be difficult for you. I’m sorry for your loss and that you have to deal with so much paperwork.

The best thing you can do when making a big financial decision like this is to be prepared and know the rules that apply to your transaction. However, this does not necessarily mean that you can easily do away with the bureaucratic formalities involved in inheriting accounts and transferring money. It’s not helpful to get confusing answers from the people who are supposed to help you solve your problem.

Unfortunately, says Chad Holmes, a certified financial planner with Montgomery, Alabama-based Formula Wealth, “That happens all the time, especially when the rules change. Even with automated features and calculators, there are delays.” “It can be scary if you’re relying on something like that.”

It’s no fun hearing that rules are rules, but when it comes to money, financial institutions tend to follow IRS guidelines and other laws very strictly. Most of this is to prevent theft and abuse, but some of it also has to do with collecting the appropriate taxes.

what are the rules

If you inherit an IRA as a spouse, you have more options than other heirs, and most likely you will need to use the inherited IRA structure. This means you must take all the money out by the end of the decade and take required minimum distributions each year (except when the government says you don’t have to do so, such as during a pandemic).

Your spouse may choose to inherit the account that way, as you did, or you may choose to put the funds into your own IRA. The formula used to calculate the amount you must withdraw each year is typically the IRS’ Uniform Life Table. This table divides account balances as of December 31 of the previous year by an age factor. With a rollover, everything goes as normal except your balance gets bigger.

You must make your choice within 60 days of inheriting the account, which is probably why it has already passed and your account custodian does not want to make changes.

Just as December 31 is set as the last day of the tax year, “these rules are pretty much set in stone, so there’s very little opportunity to modify them,” says Nilay Gandhi, a certified financial planner and senior wealth advisor at Vanguard.

One piece of good news is that it looks like you took the right path for your wife with a 2022 year-of-death RMD, since many families forget to do this and end up being punished.

But if you could go back in time, what would you have done differently with the inheritance election? And for others who are facing this problem now? Before making your choice, you can simply calculate which method is better. All you need for an IRS worksheet or RMD calculator on the web is the previous year’s account balance, your age, and your wife’s age. Alternatively, you can contact your account manager to help you crunch the numbers, or contact a financial advisor or tax professional.

Whatever they tell you or what you find out on your own, it’s best to double-check or get a second opinion, as you’ve probably already experienced.

There are many moving parts to these calculations, so opinions may differ. The amount of your RMD will first of all depend on the age dynamics involved. It may be more advantageous to do a rollover if the deceased was an older spouse (less than 10 years), and vice versa if the deceased was a younger spouse.

It’s also important if one or both of you are over 59 ½ and no longer subject to early withdrawal penalties or are over the RMD taking age (currently 73). Your overall financial situation is important, as well as your overall tax burden. For example, if you need to withdraw more than you need to cover living expenses, the account designation doesn’t really matter.

But don’t feel bad if you haven’t done this on the frontend. That happens a lot. “It is not uncommon to see bad decisions being made,” says Gandhi.

make the most of

A possible solution to bureaucracy is to ensure that other custodians are friendly to the change. Gandhi made a few calls to see if he could move his account to another financial institution and was told he could change his choice to a spousal IRA rollover in the process.

You can also see the positive side of this situation. Yes, a larger RMD means your current tax bill will be larger, but there are ways to mitigate this and even tap into additional funds outside of your tax-deferred IRA.

Holmes suggests looking at your overall tax rate and goals. If you’re interested in philanthropy, you can use your extra-large RMDs for a Qualified Charitable Distribution (QCD). Or, if you’re planning to leave money for your heirs and they’ll pay a higher tax rate than you, taking out more money now may be tax efficient in the long run. You can then inherit your investments step by step through your brokerage account. “This may change your priorities,” says Holmes. “We have to think about the next generation.”

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