Texas residents whose spouses predecease them and leave them an individual retirement account may be confused about the best way to protect the asset from penalties. The key to deciding what to do with the money depends on the age of the deceased and that of the surviving spouse.
There are two basic decisions to be made — to shift the money into an inherited IRA and keep it as a tax shelter or to roll the funds into a separate individual IRA.
According to a technical consultant, when deciding what to do, consider age. If the survivor is younger than 59 1/2 and the deceased spouse died before making 70 1/2, and the money is needed, it is better to remain a named beneficiary. Rolling the money into his or her own IRA and making any withdrawals will incur 10 percent penalties until the age of 59 1/2. Remaining a named beneficiary will allow the survivor to make withdrawals as needed without penalty, but the IRA must be retitled as an inherited IRA.
The decision made can impact the next generation of heirs. When the surviving spouse rolls the IRA into his or her own, beneficiaries can factor in their own life expectancies when taking distributions as they, in turn, inherit the money. Beneficiaries are able to stretch out the distributions over the period of their remaining lives if it is kept as an inherited IRA.
A Georgia consultant stresses that the surviving spouse is “not locked into that option,” and may roll the funds into a separate account at a later date.
If the survivor is younger than 70½ with no pressing need to access the money, it’s generally a good idea to go ahead and make the IRA solely his or hers. The minimum distributions won’t begin until the minimum age requirement of 70½ is met.
If the original owner of the IRA died prior to having to take the minimum distributions, spouses who are named beneficiaries won’t have to begin taking disbursements until the time the late spouse would meet that age criteria had he or she lived. April 1 is the “required beginning date” in the year after the owner reaches the 70 1/2 milestone.
Don’t wait until the death of a spouse to sort this out. An estate administration attorney can explain your options to you at a time when you are not under stress and grieving.
Source:DailyFinance.com, “When a Spouse Inherits an IRA” Rachel L. Sheedy, Apr. 22, 2014