The Spousal Choice

by Joe on September 2, 2013

Men, on average, live about 5-7 years less than women. So, for purposes of this discussion, we’ll look at the choices when a woman inherits her deceased husband’s IRA.

It’s a unique decision. When an IRA is inherited from a spouse, you have the choice of treating it an an inherited IRA or treating it as your own. There are pros and cons to each type of account, and the wrong decision can cost you.

Inherited IRA

  • If you are under 59-1/2, the inherited IRA permits withdrawals with no penalty, just tax at your marginal rate. Well, it’s more than permits, there’s actually an RMD, a required minimum distribution.
  • If more than the RMD is desired, still no penalty, just tax. This can potentially tide you over until your normal retirement funds are available to you.

IRA moved to your name

  • Your heirs will have the ability to take withdrawals over their lifetime vs using your withdrawal schedule for the inherited IRA approach.
  • Since the IRA is in your name, you have the opportunity to convert to Roth. This strategy may help save you the potential tax on your social security income or simply help with long term tax planning. Your heirs will certainly appreciate the ability to take their withdrawals with no income tax due.

Too often, I’ve seen a young person pass away and the broker/advisor quickly move the funds into the survivor’s IRA, as if there were no choice. Then, until the surviving spouse is 59-1/2 any withdrawals are subject to 10% penalty in addition to the tax due. Be aware of your options. There’s no right choice, except for your own circumstance.

{ 1 comment… read it below or add one }

Honolulu Aunty September 2, 2013 at 3:14 pm

Mahalo for another good one Joe!

When it comes to IRAs, especially the Roth IRA, it makes being me glad to be older because of so much more flexibility with withdrawals. Good to know that our heirs will benefit from tax free withdrawals too.

So for estate planning purposes, is the value of the Roth IRA included in the asset numbers when computing the death taxes?



Leave a Comment

Previous post:

Next post: