4 unusual IRA issues related to deaths in 2020

An adviser called me with his concerns about a client who just died from COVID-19 but had not yet made his 2019 contribution to his individual retirement account. The client had already filed his taxes, though, and claimed the IRA deduction. Given the coronavirus situation, the IRS has extended the 2019 IRA contribution deadline to July 15. Can that 2019 IRA contribution still be made? No. His estate representative will have to amend his tax return and remove the tax deduction.

For IRA owners or beneficiaries who die in 2020, some of the new tax rules from the SECURE Act and the CARES Act can bring about unexpected results.

IRA contributions

In the case above, even though the IRS extended the date for making a 2019 IRA contribution, a contribution still cannot be made in this situation. The IRS ruled years ago that once IRA owners die, they can no longer make an IRA contribution, even if it is for the prior year when they had qualifying earnings.

What’s the rationale for this? In one of the most logical IRS opinions ever issued (PLR 8439066), the IRS simply said that a contribution made after the death of the account owner “would not be a contribution for retirement purposes.” In other words, you can’t make a retirement contribution after you’re dead because you no longer need a retirement plan. It is hard to argue with that logic. The IRS opinion said that “the primary purpose of the IRA is for retirement.”

In a later ruling (PLR 8527083), the IRS allowed the surviving spouse to make an IRA contribution to her spousal IRA after the death of the working spouse. After all, the surviving spouse will still need a retirement account.

However, if it was a SEP IRA contribution, instead of an IRA contribution, the answer would be yes. The employer must still fund a SEP IRA for qualifying employees even if they have since died.

Death in an RMD year

Normally when an IRA owner dies, the beneficiary has to take a year-of-death required minimum distribution if the IRA owner did not take his full RMD before he died. But this year that doesn’t matter. The CARES Act waived RMDs due in 2020, so no year-of-death RMD is required. The beneficiaries, who normally would have had to take that RMD, are off the hook for this year.

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IRA beneficiary dies in 2020

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries who inherit after 2019. If a beneficiary inherited in 2019 or earlier and was a designated beneficiary, that beneficiary could continue the stretch for the rest of his life. However, if the beneficiary dies in 2020, that’s the end of the grandfathered stretch IRA. The successor beneficiary (the beneficiary’s beneficiary) will have to withdraw any remaining balance in the inherited IRA under the new 10-year rule, even if that successor would have qualified for the stretch as an eligible designated beneficiary, for example, if she was a minor child.

Even a 6-year-old successor beneficiary will have to withdraw the inherited funds by the end of the 10 year after the original beneficiary’s death. It won’t be uncommon for a successor beneficiary to be very young and have only 10 years to empty the inherited account.

IRA owner dies in 2020 with no named beneficiary

With all the new post-death rules, this one is oddly easy: There was no change under the SECURE Act for non-designated beneficiaries. These are beneficiaries that are not people, such as an estate, a charity or a non-qualifying trust. This can happen when no one is named as beneficiary and the IRA passes to the estate.

In this case, the result is the same as before. If the death is before the required beginning date, then the five-year rule applies. If the death is on or after the required beginning date for RMDs, then the beneficiary can take payouts over what would have been the deceased IRA owner’s remaining single-life expectancy, had he lived. In another strange twist, if IRA owners die in their 70s, the payout to beneficiaries can exceed the 10 years that named beneficiaries would be stuck with. Go figure!

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