Inheriting an IRA from a Deceased Spouse
The IRS gives a big break to spouses in this situation. As long as the money stays underneath some type of IRA umbrella and isn't withdrawn, no tax is owed. The key is knowing what rights you do and don't have. The first rule to know is that a spouse can follow the same basic pattern money-wise as an IRA beneficiary after the death of their spouse as before death. If withdrawals have been made in the past, some type of withdrawal can likely continue if set up properly.
The second rule to know is that a spouse has three basic options with regard to themoney. 1. Cash out the IRA all at once or in parts and pay the tax, which may be a larger amount if the withdrawal is made all at once. In addition, there maybe a 10% penalty for withdrawal if the either spouse is or was under age 591/2 . 2. Rollover the IRA funds to your own IRA. 3. Rollover the IRA funds to a Beneficiary IRA in the name of the deceased owner.
Two scenarios usually develop - one for younger folks and one for older folks. For those under age 70 1/2 or those who aren't intending to withdraw any money from the IRA: Most people look at rolling over the deceased person's IRA to their own IRA because no tax is paid (option #2). However, rolling over money to a Beneficiary IRA (option #3) may be a better choice if either person is under age 59 1/2. The Beneficiary IRA allows the spouse beneficiary to withdraw funds as if their age was the same as the deceased person. So, if Mr. Smith who is 60 dies and leaves his IRA to his wife who is 55, if she just rolls the money to her own IRA (like #2), she would incur a penalty if she touched it. She would have to wait almost 5 years to access that money penalty free. If the money were rolled to a Beneficiary IRA (#3), she could access funds with no IRS penalty. Withdrawals will be taxable in all cases, but the extra 10% penalty could be averted. In situations where life is in a state of flux, such as this, retaining the flexibility to tap money penalty free may come in handy. For those over age 70 1/2 and who are taking mandatory distributions: The spousal beneficiary can continue those distributions or alter them. There are other rules, but this is the short answer.
The bottom line is that a spousal beneficiary can rollover funds in some way, shape, or form and not pay tax. If however, they wish to withdraw funds, this can be arranged but planning must be done to avoid as much tax or penalty as possible. Consulting a qualified tax or financial professional would be wise in any case.
The second rule to know is that a spouse has three basic options with regard to themoney. 1. Cash out the IRA all at once or in parts and pay the tax, which may be a larger amount if the withdrawal is made all at once. In addition, there maybe a 10% penalty for withdrawal if the either spouse is or was under age 591/2 . 2. Rollover the IRA funds to your own IRA. 3. Rollover the IRA funds to a Beneficiary IRA in the name of the deceased owner.
Two scenarios usually develop - one for younger folks and one for older folks. For those under age 70 1/2 or those who aren't intending to withdraw any money from the IRA: Most people look at rolling over the deceased person's IRA to their own IRA because no tax is paid (option #2). However, rolling over money to a Beneficiary IRA (option #3) may be a better choice if either person is under age 59 1/2. The Beneficiary IRA allows the spouse beneficiary to withdraw funds as if their age was the same as the deceased person. So, if Mr. Smith who is 60 dies and leaves his IRA to his wife who is 55, if she just rolls the money to her own IRA (like #2), she would incur a penalty if she touched it. She would have to wait almost 5 years to access that money penalty free. If the money were rolled to a Beneficiary IRA (#3), she could access funds with no IRS penalty. Withdrawals will be taxable in all cases, but the extra 10% penalty could be averted. In situations where life is in a state of flux, such as this, retaining the flexibility to tap money penalty free may come in handy. For those over age 70 1/2 and who are taking mandatory distributions: The spousal beneficiary can continue those distributions or alter them. There are other rules, but this is the short answer.
The bottom line is that a spousal beneficiary can rollover funds in some way, shape, or form and not pay tax. If however, they wish to withdraw funds, this can be arranged but planning must be done to avoid as much tax or penalty as possible. Consulting a qualified tax or financial professional would be wise in any case.
posted by Shari Burnum @ 3:54 PM
