By Andy Ives, CFP®, AIF®
A daughter who has been diagnosed with rheumatoid arthritis is listed as the beneficiary on her father’s Roth IRA. Does this disease qualify as a “chronic illness” for purposes of the exception to the 10-year rule? Is there a definition that the IRS uses for chronic illness? If she doesn’t take the inherited IRA after 10 years but withdraws it based on her life expectancy, will the IRS send a letter to her where she has to prove chronic illness? If the IRS doesn’t agree, what will they assess her since the amount is not taxable?
There is no list of illnesses that qualify as “chronically ill.” Instead, to meet the criteria as a chronically ill individual under the SECURE Act, the daughter must be certified (by a licensed health care practitioner) to be unable to perform at least 2 activities of daily living for at least 90 days, or require “substantial supervision” due to a severe “cognitive impairment.” It is incumbent upon her to proactively prove she is chronically ill if she intends to stretch inherited IRA payments over her life expectancy. If the IRS rejects her claim of chronically ill and the inherited IRA is not emptied after 10 years, there will be a 50% penalty on any dollars remaining in the account, despite the fact that this is an inherited Roth IRA.
When I move my 401(k) to an IRA, I understand that I have to take the RMD first. Can I use that RMD as a QCD?
You are correct that you must take your RMD from the 401(k) prior to rolling over any balance to an IRA. That is because RMDs are considered “first dollars out,” and because RMDs are ineligible for rollover. Since the RMD is applicable to the 401(k) plan, it cannot be offset with a QCD. Only RMDs from IRAs qualify for a QCD.