Recently Widowed: You have choices when it comes to your spouse's IRA

In the aftermath of losing a spouse, it can be challenging to know which choices to make, when to make them, and sometimes, whether or not to make any choice at all. Identifying the opportunities that you may have in order to develop a framework for moving forward in a more positive direction in your life will help you to gain clarity through your transition. When you are grieving a loss and going through a major life change it can be extremely challenging to address the more practical aspects of your loss and it helps to have a trusted advisor who can help position you for a financial future with peace-of-mind and confidence.

INHERITING YOUR SPOUSE'S IRA

When a person inherits an IRA from a spouse, they are faced with several choices. These choices are based on different practical factors that are critical to making the right choice.

THREE FACTORS TO CONSIDER:

1. ARE YOU YOUNGER THAN YOUR SPOUSE?

   If you are younger than 59 ½ and your spouse was younger than 70 ½, then you may want to consider transferring the account out of an inherited IRA and into your own name. If it stays in the inherited account, then you will need to being taking RMDs when your spouse was supposed to turn 70 1/2. If you transfer it to your own IRA account, then the assets will be able to grow for longer before you are required to take distributions.

   
   
2. ARE YOU OLDER THAN YOUR SPOUSE?
   
   If you are over the age of 70 ½, but your spouse was under that age when they passed, then you do not have to take the distributions until their RMD beginning date (the April after they were to turn 70.) Though this sounds like it would make sense to keep it in the inherited account, since you can defer the RMDs for a long time, once you being taking them, they are based on yours, not the original account owner's life expectancy. This means that the withdrawals will be substantially larger when you do have to being taking them. If you were to transfer the account to your own name and take the RMDs immediately, then you would have more left in the account to grow because the withdrawals would be substantially less than in the first scenario.


3. DO YOU NEED THE MONEY?
No.

If you are younger than 70 ½ and your spouse had already begun taking distributions and you aren't in need of the money, then you will have more growth potential for those assets if you make the account your own. If you leave it as an inherited IRA, you will be required to take distributions immediately. If you were to transfer it to your own account you would not have to begin taking RMDs until you turn 70 ½, thus leaving the assets with more time to grow.

Yes.

If you need the money from the IRA you have inherited, then you are best off keeping it in a beneficiary account, especially if you are under the age of 59 ½. If you were to roll it into your own account and then find the need to withdraw it, you'll pay a penalty of 10% until you are 59 ½, unless you are paying for a first house, school tuition, medical expenses or other qualified early withdrawal exceptions. If you remain a named beneficiary, you can tap the account without penalty.

As is the case with any financial decision, seeking the advice of a trusted and experienced advisor, accountant and estate attorney to discuss your specific circumstances is highly recommended. When you are experiencing a transition, delegating tasks to simplify your life can be helpful in addressing the emotional and psychological aspects of what you might be going through.

We hope that you found this information useful and we are happy to provide guidance and skilled advice during times of transition. Please contact us at info@northstarfp.com with any questions or to schedule an appointment.

Sources for this article:

i. http://www.fa-mag.com/news/when-is-an-inheritance-too-big-27484.html

ii. http://www.cnbc.com/2016/06/15/the-great-wealth-transfer-has-started.html

Written by Robin Young, CFP®