In the event that you're fortunate enough to receivemoney as the beneficiary of someone's retirementaccount, you'll have several options, but makingthe wrong choice could cost you thousands of dollars.If you are the sole beneficiary of your spouse's retirementaccount, you have even more complex choices.
If your spouse dies and leaves you their retirementaccount, you may either roll the account over into anIRA in your name or continue to hold the money inyour deceased spouse's name with you as the beneficiary.Certainly, the most straightforward solution is todo a rollover into your name. This allows you to treatthe IRA as your own and continue to defer interest,dividends, and capital gains until you must begin takingdistributions at age 70½. There can, however, beadvantages to maintaining the account as a deceasedspouse IRA with you as the sole beneficiary. If thedeceased spouse is younger than you, maintaining theaccount in their name would allow you to postponethe required minimum distributions until they wouldhave turned age 70½. For example, let's say you're age72 and your spouse dies at age 60. If you did a spousalrollover into your name, you would have to begin takingdistributions immediately. By holding the money inyour deceased spouse's name, you may postpone takingdistributions until they would have turned age70½. Furthermore, if you are under age 59½, byusing this strategy you could begin taking distributionswithout being subject to the 10% federal penaltyforearly distributions. If you do an IRA rollover into yourname, the federal penalty will apply.
If you are a nonspouse beneficiary of a retirementaccount, you have two basic options. At the death ofthe IRA owner, you can postpone taking any distributionsuntil December 31 of the year that is the fifthanniversary of the owner's death. Prior to that endingdate, you must take distribution of the entire accountand pay the income taxes due. Your second option isto take distributions over your own life expectancy,but you must take first distribution by December 31 ofthe year following the IRA owner's death.
Where there are multiple beneficiaries of a retirementaccount, such as your children, you have theoption of creating separate accounts by December 31of the year following the death of the retirement accountowner. By doing so, each beneficiary is allowedto use their own life expectancy in determiningrequired annual distributions. Otherwise, the requireddistributions for all beneficiaries will be based on thelife expectancy of the oldest beneficiary. Special rulesapply if the IRA owner died after reaching age 70½,so you should consult your tax advisor as to how therules affect your choices.
Also, whether you are a spouse or nonspouse inheritorof a retirement account, you have the option ofdisclaiming your interest in the inheritance, therebyallowing the proceeds to go to the next beneficiary. Forexample, if you are the primary beneficiary of yourspouse's plan but don't need the money, and your childrenare the contingent beneficiaries, by disclaimingyour interest the proceeds will go to your children.This maneuver potentially avoids or reduces bothestate and income taxes.
, is the founder of the Welch Group,
LLC, which specializes in providing fee-only wealth management
services to affluent retirees and health care professionals throughout
the United States. He is the coauthor of J.K. Lasser's New Rules
for Estate and Tax Planning (John Wiley & Sons, Inc; 2001). He welcomes
questions or comments at 800-709-7100 or visit www.welchgroup.com.
This article was reprinted with permission from the Birmingham Post Herald. He
thanks his partner Scott Lee for his assistance with this article.
Stewart H.Welch III, CFP®, AEP