Transactions Permissible and Not Permissible Upon the Death of An IRA Owner

Many federal employees and retirees own Individual Retirement Arrangements (IRAs). For both IRA owners and their beneficiaries, it is important to know and understand what transactions are and are not permitted upon the death of the IRA owner.

This column discusses IRA contributions (including spousal IRA contributions), qualified charitable distributions, required minimum distributions (RMDs) and rollovers following the death of a traditional IRA and Roth IRA owner.

Post-Mortem IRA Contributions

In a Private Letter Ruling (PLR) 38 years age, the IRS ruled that upon the death of an IRA owner (traditional IRA or Roth IRA), an IRA contribution designated for the year of death cannot be made. This ruling is applicable even if the IRA owner was alive for all of the previous year and had earned income allowing him or her to make an IRA contribution for that year (contribution can be made until the federal income filing deadline of April 15th of the current year). The following example illustrates:

Example 1. Marge, age 63 and a federal employee, worked throughout all of 2021. She received her 2021 W2 statement in January 2022 and was intending to make her 2021 Roth IRA contribution of $7,000 (which she was eligible for) in early March 2022. She unexpectedly died in February 2022. Marge’s Executor of her estate will not be able to make a 2021 Roth IRA contribution on her behalf. If such a contribution is made, it will be considered an excess contribution, subject to an ”excess” contribution penalty (equal to 6 percent of $7,000, or $420) for 2021 and each subsequent year the $7,000 contribution remains in the IRA.

Example 2. Richard died on April 2, 2022 and had not made his 2021 traditional IRA contribution, deductible on his 2021 federal income tax return as an adjustment to income. However, he had already filed his 2021 federal income tax return and claimed the deduction with the intention of making the contribution before April 19,2022, the filing deadline. Since Richard died before he actually made his 2021 IRA contribution, no one – including his wife (with whom he files a married filing joint tax return for 2021) – can make a contribution on his behalf. Richard’s accountant will have to amend Richard’s married filing joint tax return and remove Richard’s 2021 traditional IRA contribution tax deduction.

While IRA contributions cannot be initiated after the death of the IRA owner, if the IRA contribution process actually began prior to the death of the IRA owner (for example, a check for the IRA contribution was mailed to an IRA custodian) and the IRA owner died thereafter, then the IRA contribution is allowable. The following example illustrates:

Example 3. Sherry mailed two separate checks to her Roth IRA custodian in March 2022. One check was designated as a 2021 Roth IRA contribution and the other check was designated as a 2022 Roth IRA contribution. Sherry unfortunately and unexpectedly died on April 8, 2022. Since Sherry initiated and completed the IRA contribution process (her Roth IRA custodian accepted and processed her checks) both Sherry’s 2021 Roth IRA contribution and her 2022 Roth IRA contribution were allowed.

Post-Mortem Spousal IRA Contributions

A spouse of a deceased individual (who is not allowed to make a post-mortem IRA contribution) is allowed to make a “spousal IRA” contribution to his or her IRA based on income earned by the deceased spouse.

Post-Mortem Qualified Charitable Distributions (QCDs)

Qualified charitable distributions (QCDs) cannot be made from a decedent’s IRA account post-mortem. A QCD is allowable only if the QCD was initiated prior to the death of the IRA owner (who must have been at least age 70.5 at the time of his or her death). This is the case even if the beneficiary(s) and all interested parties agree on doing a QCD. In other words, a QCD cannot be made from the deceased’s IRA.

It should be noted that immediately upon death of the IRA owner, the IRA account belongs to the named beneficiary(s) as an “inherited IRA”. While these named beneficiary(s) cannot request a QCD from the original IRA on behalf of the deceased IRA owner, they can request a QCD from their inherited IRA if they otherwise qualify to make a QCD (that is, they are at least age 70.5). The following example illustrates:

Example 4. Charlotte, age 76, plans to give her five favorite charities a total of $100,000, the maximum QCD an individual can make in any year. Charlotte intends to make a $20,000 QCD to each of five qualifying charities during 2022. After giving a total of $80,000 in QCDs to four charities between Jan. 1, 2022 and July 31, 2022, Charlotte died on August 4, 2022. Charlotte’s IRA beneficiaries are her sister Rose, age 78, and her brother Malcolm, age 72. Rose and Malcolm are fully aware of their sister’s desire to give $100,000 in total QCDs to the five charities during 2022 and they want to complete the last $20,000 QCD. They understand that they cannot process the $20,000 remaining QCD from Charlotte’s IRA. But Rose and Malcolm realize they are eligible and can initiate a QCD from their respective inherited IRAs because they are both over age 70.5.

Post-Mortem Required Minimum Distributions

Upon reaching his or her required beginning date (RBD) (April 1 following the year an individual born before July 1, 1949 reaches age 70.5) the individual must take required minimum distributions (RMDs) from his or her traditional IRA. This is the case even if the individual is still working past his or her RBD. For individuals born after June 30, 1949; the RBD is April 1 following the year an individual reaches age 72.

In the year that an individual who has reached his or her RBD dies, a traditional IRA RMD on behalf of the deceased traditional IRA owner must be taken no matter who is the IRA beneficiary (a spouse or a non-spouse). Under the SECURE Act which became effective Jan. 1, 2020, only eligible designated beneficiaries (EDBs) are permitted to “stretch” inherited IRA payments over their life expectancies, starting the year after the death of the original traditional IRA owner.

EDBs include spouses, minor children of the traditional IRA owner until they are age 21, disabled individuals, chronically ill individuals, and those beneficiaries not more 10 years younger than the IRA owner.

The question is: Can an individual become an EDB post-death? The answer: No. According to the SECURE Act, the time for the determination of whether a designated beneficiary is an EDB shall be made as of the date of the death of the IRA owner.

It needs to be emphasized that a non-EDB who inherits any type of IRA traditional IRA or Roth IRA) must withdraw their inherited IRA accounts within 10 years of the death of the IRA owner. Also, if a deceased traditional IRA owner had reached his or her RBD, then the non-EDB must take RMDs during years 1 through 9 of the 10-year period following the year of the death of the IRA owner.

The following example illustrates: “Death and timing, when an EDB is determined”.

Example 5. Jose, age 76, died in March 2022. He named his adult son Carlos, age 35, as his traditional IRA beneficiary. Since Jose was past his RBD of 70.5 at the time of his death, under the SECURE Act Carlos as a non-EDB is subject to the 10-year payout rule for his inherited IRA.

Unfortunately, Carlos gets into a car accident and becomes fully disabled as defined under the Internal Revenue Code (IRC). In spite of the fact that Carlos is disabled, Carlos cannot stretch the inherited IRA RMDs over his life expectancy because Carlos was not considered totally disabled as of the date of his father’s death.

Post-Mortem IRA Rollovers/Direct Transfers

The question is the following: If an IRA owner or a retirement plan participant (such as the Thrift Savings Plan participant) takes a retirement plan distribution but then dies while IRA funds or retirement plan funds are outside of an IRA, can the executor or personal representative of the deceased IRA owner or deceased retirement plan participant rollover that distribution to an IRA? There has been a US Tax Court case and several IRS private letter rulings (PLR) addressing this question with different results.

In a 1982 Tax Court case, an individual who worked in private industry and retired with a 401(k) qualified retirement plan took a distribution from his qualified retirement plan but died before completing his rollover to an IRA. The Tax Court allowed the executor of his estate to rollover the distribution. Nearly 20 years later, the IRS made an opposite determination in PLR 200204038, noting that the circumstances were different. A qualified retirement plan participant requested a direct rollover to his traditional IRA. He died before all assets were liquidated and prior to the money actually being distributed. The IRS denied the rollover.

During 2004, 2005,2012, 2913 and 2015, the IRS issued subsequent PLRs regarding surviving spouses, the sole beneficiary of their deceased spouse’s IRAs, with respect to what they were allowed to do with respect to rollovers of their deceased spouses’ IRAs. In each of these PLRs, the deceased spouse had taken a distribution from his or her IRA but then died. The IRS allowed the surviving spouse to rollover the withdrawn IRA assets into the deceased spouse’s IRA after the death of the spouse.

In the case of late rollovers, it is important to mention that in general, a rollover must be completed within 60 days of the IRA owner or qualified retirement plan participant (including a TSP participant), receiving the distribution. If the IRA owner or qualified retirement plan participant dies while the distribution is still in the possession of the IRA owner or qualified retirement plan participant, the beneficiaries may not be aware of the original distribution amount until after the 60-day period has expired.

There have been many requests to the IRS for post-death rollovers beyond the 60-day window. Numerous IRA PLRs have allowed late rollovers due to the death of the IRA owner or qualified retirement plan participant.

Note that in IRS Revenue Procedure 2020-46, the IRS has allowed certain late rollovers by providing the receiving financial institution with a “self-certification” letter. Although “death of IRA account owner or qualified retirement plan participant’ is not one of the dozen acceptable self -certification allowances, it may still pay for an individual to utilize the IRS self-certification rather than requesting an IRS PLR. This is because although the PLR option is always available, the PLR option is expensive (may cost as much as $10,000) and require the deceased IRA owner’s or qualified retirement plan participant’s estate be kept open until the issue is resolved.