Terry in Oviedo, Fla.
Dear Terry,
I am deeply sorry to hear about your dad’s illness. It’s an incredibly tough time for your family.
Understanding the Options
When it comes to rolling an IRA of a deceased spouse, it’s important to consider the available choices. Spouses have the option to roll the IRA into their own account, which is often viewed as the most common choice. However, it may not always be the best one. Let’s dive deeper into the alternatives.
The Advantage of Rolling into Your Own IRA
Rolling your dad’s IRA into your mom’s IRA can be a straightforward process. By doing so, it will be treated as if she has always owned it. This simplicity and convenience make it the preferred choice for many surviving spouses.
Considering the Survivor’s Age
But let’s dig a little further. Age plays a significant role in determining the optimal course of action.
Example 1: Younger Than 59 ½
If your mom is younger than 59 ½, she has an interesting alternative. Opting for a spousal inherited IRA means she can withdraw funds without incurring a 10% penalty, even if she is below the age threshold. However, if she decides to roll it into her own IRA, the exception for distributions due to death does not apply. As a result, any withdrawals would be subject to both the 10% penalty and normal taxes.
Example 2: Older Than 59 ½
On the other hand, if your mom is older than 59 ½, rolling the IRA into her own account becomes less of a concern. In this scenario, she can take advantage of the simplicity and benefits associated with owning the IRA outright.
Consider Every Angle Before Deciding
As your family faces this important decision, I urge you and your mom to carefully weigh all the factors at play. While rolling the IRA into her own account may seem like the natural choice, it’s crucial to understand the potential implications based on her age.
Sincerely,
Important Considerations when Inheriting an IRA
Making Decisions with an Inherited IRA
Once an IRA is rolled into the surviving spouse’s IRA, it cannot go back into an inherited IRA. Consequently, many young survivors will keep the IRA as a spousal inherited IRA until they are certain they will not need to make withdrawals prior to 59 ½. At that point, they typically roll the inherited IRA into their own IRA.
Impact on Required Minimum Distributions (RMD)
If the surviving spouse is older than the deceased husband and chooses to roll the IRA into her own, those funds would be subject to Required Minimum Distributions (RMD) sooner. It is important to note that the older the beneficiary and the greater the age difference, the more dramatic the impact on RMD. On the other hand, if the deceased husband was not yet subject to RMD and the surviving spouse takes the IRA as an inherited IRA, she can even wait until he would have been subject to RMD before taking any withdrawals.
Alternative Scenarios
If none of the above examples apply or if the surviving spouse is younger than the deceased husband but already over 59 ½, it may be advisable for her to keep it simple and roll her husband’s IRA into her own IRA upon his passing.
Terry, I wish your mom, dad, and your entire family all the best.
If you have a question for Dan, please email him with ‘Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
