Younger Surviving Spouse Options for IRAs

| January 09, 2016
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When a person owns an individual retirement account, you get to name beneficiaries on the IRA. If you’re married, usually your spouse is the named primary beneficiary. What are your options if your spouse passes away with an IRA? We’re going to examine the ways that a surviving spouse can take receipt of the deceased spouses IRA.

How Should a Younger Surviving Spouse inherit an IRA?

When a person dies with an IRA there can be taxes and penalties if it’s not handled in the proper way. It’s not as simple as cashing it out and taking the money, because of these taxes and penalties.

There are some things that should be done before the IRA owner passes away, as well as some things that should be done after. The original owner of the IRA is responsible for things that should be done before death, and the beneficiary takes care of things afterwards.

Probably the most important thing the original IRA owner should do is make sure beneficiaries are named on the IRA. This is done with a beneficiary form, also called an adoption agreement. If you are married, typically your spouse is the primary beneficiary. This is very important because by law a surviving spouse has unique options.

This leads to what should be done after an IRA owner dies and the main options a surviving spouse beneficiary has in this situation. Let’s take a look:

If the surviving spouse is OVER age 59 ½, one unique option is the spousal rollover. This is where you may transfer the deceased spouses IRA to your own IRA. This is unique to surviving spouses, no one else has this option.

However, if you are under age 59 ½, this is where it can be tricky. This is because If you try to access your IRA before age 59 ½, there is a 10% early withdrawal penalty unless you meet one of the exceptions imposed by the IRS (see IRS publication 590 for more on exceptions).

But since your spouse is gone and any earned income they generated, you may need income from the IRA to help offset this loss. What if your are under age 59 ½, what do you do? Starve? Pay the 10% penalty?

There’s good news: A surviving spouse who is under age 59 ½ and needs income has another option. It’s called an inherited IRA and these are designed for beneficiaries of IRAs. With an inherited IRA there is no early 10% penalty to access the IRA before age 59 1/2. So you can take income from an inherited IRA no matter what your age with no 10% penalty.

Let’s look at an example: Jill is age 55 when her husband dies with a $500,000 IRA and she needs income. What are her choices? If Jill rolls it to a spousal IRA, she’s only 55 years old and cannot access the IRA before 59 ½ without a 10% penalty. If Jill needs income she is in a jam until she’s age 59 ½.

She might be tempted to just cash in the entire IRA. This is a terrible decision because the entire $500,000 IRA is now taxable income and will throw her into possibly the highest tax bracket! Cross that option off the list!

In Jill’s example, here is the better way:

Jill can retitle her deceased husbands IRA into an inherited IRA and the problem is solved. She can access the IRA without the 10% penalty. Once Jill reaches age 59 ½, she can still do the spousal rollover later, since there is no time limit when to do a spousal rollover.

This straightforward roadmap can save you a bundle, since most people have no idea how IRA rules work.

Lastly, keep in mind this can be a complicated process. We recommend that a surviving spouse in this situation do not touch anything! Come and talk to us first.

Have a great day!

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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