Strategies for a Spousal Beneficiary of an IRA to Take Her Distributions
by Shane Flait (2011)

 

If your spouse dies with you assigned as sole beneficiary of his IRA, then you have a few ways to take distributions from it. Depending on your age and earnings, you may find one way is the best option for you. Here’s how it works….

 

According to IRS rules, you – as the designated beneficiary of his IRA when your spouse dies – can either:

1.      Keep his name as owner of the account with your name added as beneficiary, or

2.      Rollover his IRA account into your own name as the new owner.

 

Each option has different consequences as to when you must begin your Minimum Required Distributions (MRDs).

 

In the first instance, you’ll designate the account as ‘”your name” as beneficiary of “your spouse’s name”’. This is a ‘beneficiary’ account now. Choosing to remain a spousal beneficiary requires you to begin your MRDs the year after your deceased spouse would have turned 70½. On the other hand, if you choose to be the owner of the account by naming under your name only, you can wait until the year after you turn 70½ to begin your MRDs.

 

You, of course, can begin distributions earlier in either case, but you’ll be subject to the ‘before age 59½ penalty’ for early withdrawals. So, what circumstances might influence your choice?

 

If you’re only a few years younger than your deceased husband’s age:

Suppose your husband died at age 67 when you are 64 and you both already began your retirement. Choosing to be ‘owner’ or ‘beneficiary’ doesn’t make much of difference since either you are already pulling money out of your IRAs or you intend to in a few years. You may just roll his into your own IRA to reduce the number of IRAs you have for easier management of them.

 

If you’re a stay-at-home spouse and younger than your deceased husband:

If you, on the other hand, were 57 and relying on him for income, you may want immediate access to distributions from his IRA since he passed 59½ in age . If you took his IRA as a new owner, you’d be penalized for distributions before turning 59½ since you’re only 57. That means your withdrawals are subject to income tax and a 10% penalty tax on top of that.

 

But if you remain a spousal beneficiary of his IRA, you can begin distributions for his IRA right away without penalty since he was over 59½.

 

If you’re a working spouse who is much younger than your deceased husband:

But what if you, again, are only 57 but still working and making good money?

In that case you may not want to remain a spousal beneficiary which would trigger MRD requirements in only 3 or 4 years when your deceased husband would turn 72½ . Those required distributions would add to your working income then making them taxed at a high income tax rate.

 

In this case, you’d be better off taking ownership of his IRA and then waiting until you retire when your income drops before taking distributions. You just may want to wait until you reach 70½ to conserve as much of it as possible for later needs.