by DAVID NOVAK
One thing many retirees face at some point is inheriting an Individual Retirement Account (IRA) from the death of a spouse. If you are the primary beneficiary of an IRA, there are several factors you must consider to make sure you don’t end up paying additional taxes or miss the opportunity for future tax-deferred growth.
Inherited IRA’s are subject to Required Minimum Distribution rules; age requirements can differ slightly. As the spouse and primary beneficiary of an IRA owner, you basically have two main options for the assets.
The first is to roll over the assets into a new or existing IRA in your name. This is where inheriting the assets as a surviving spouse allows you one major benefit that non-spouse beneficiaries do not enjoy—the ability to treat those assets as if they were your own.
Even if your spouse had attained age 70½, and you have not, you can delay distributions until you reach 70½, when you are required to take your own RMDs. If you don’t have an immediate need for the money, this will allow you to keep the money in a tax-deferred account as long as possible.
Normal distributions (i.e., those taken when you are over 59½) are taxed as ordinary income. Also, remember that if you are under age 59½ and need to access any of the IRA assets you inherit, you will be subject to a 10% early withdrawal penalty if you roll those assets into your own IRA and then take a distribution.
Transferring the assets to an inherited IRA may make the most sense if you are under age 59½ and need to access any of your spouse’s IRA assets. You won’t be subject to the standard premature 10% penalty when you take withdrawals from an inherited IRA before age 59½. Once you reach age 59½ or no longer need to use those assets, you can transfer the inherited assets into your own IRA.
Spousal inheritors also have additional rules regarding the timing of RMDs for inherited IRAs. You can begin taking RMDs in the year after the year of death, or you can delay beginning RMDs until your spouse would have turned age 70½.
This is especially beneficial if you were older than your spouse since the RMD amounts will be based on your spouse’s age. Once you reach the year that your spouse would have turned age 70½, you may also want to consider transferring the inherited assets into your own IRA.
In a very small number of cases, there may be other possibilities to consider, such as disclaiming the IRA assets. Make sure you know the ramifications of each.
David Novak, CFP® is a Certified Financial Planner™ at
Novak & Powell Financial Services in Pinellas County.
Please note: he is not an attorney and this article
should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.